In a previous post entitled "Banking 101", I explained that the U.S. banking industry engages in fractional banking. This means that only a small amount of the money "deposited" in a bank is required to be kept in the bank's vault. Most of the money is loaned to other customers.

When a customer obtains a loan - let's say for $1,000 - the bank records the amount of that loan as an asset because the bank will collect interest on the loan. The amount of the loan - $1,000 -is also recorded as a liability by the bank because the money is now in circulation. The banks books are in balance (pay-out of $1,000 equals the loan asset of $1,000).

If the borrower is unable to make payments on the loan it ceases to be a bank "asset" and the $1,000 loan asset disappears from the bank's books. The $1,000 liability remains, however, because the money is circulating through the economy. read more »

In a previous post entitled “Banking 101" (link below) I explained that the U.S. banking industry engages in fractional banking. This means that only a small amount of the money “deposited” in a bank is required to be kept in the bank’s vault. Most of the money is loaned to other customers.

When a customer obtains a loan - let’s say for $1,000 - the bank records the amount of that loan as an asset because the bank will collect interest on the loan. The amount of the loan - $1,000 -is also recorded as a liability by the bank because the money is now in “circulation.” The banks “books” are in “balance” (pay-out of $1,000 equals the loan asset of $1,000). read more »