{"format":"alysly-page/1","url":"https://alysly.com/research/how-banks-create-money/","json":"https://alysly.com/json/research/how-banks-create-money/index.json","lang":"en-US","title":"How Banks Create Money: Loans, Interest and Costs Since 2003","description":"When a bank grants a loan, new money is created. What limits this, what loans in Germany have cost since 2003 and when inflation erodes debt.","published":"2026-11-12T00:00:00Z","modified":"2026-11-13T16:06:51+01:00","alternates":[{"lang":"de-DE","url":"https://alysly.com/de/research/wie-banken-geld-schaffen/","json":"https://alysly.com/json/de/research/wie-banken-geld-schaffen/index.json"}],"about":"Machine-readable version of the page at url. It contains the text, tables and key figures published there, but not the interactive charts and tools.","breadcrumb":[{"name":"Research","url":"https://alysly.com/research/"},{"name":"How Banks Create Money: What Happens When a Bank Lends","url":"https://alysly.com/research/how-banks-create-money/"}],"content":[{"type":"heading","level":1,"text":"How Banks Create Money: What Happens When a Bank Lends"},{"type":"paragraph","text":"By Alexander Bock, founder and data analyst","links":[{"text":"Alexander Bock","href":"https://alysly.com/about/"}]},{"type":"image","src":"https://alysly.com/research-img/how-banks-create-money-photo.webp","alt":"How Banks Create Money: What Happens When a Bank Lends"},{"type":"paragraph","text":"Photo: Brett Sayles / Pexels","links":[{"text":"Brett Sayles","href":"https://www.pexels.com/@brett-sayles"},{"text":"Pexels","href":"https://www.pexels.com/photo/facade-of-old-bank-with-columns-7447655/"}]},{"type":"paragraph","text":"Most of the money that households and businesses pay with consists of bank deposits. These deposits are mainly created when banks lend. The Deutsche Bundesbank and the Bank of England have described the process in detail. Our own interest rate series show what loans in Germany have cost since 2003 and when inflation made them cheaper in real terms."},{"type":"paragraph","text":"Key finding as of Aug 31, 2026: €3,059 to €14,582 (interest on €50,000 over ten years, depending on the year the loan began (2021 or 2003))."},{"type":"list","ordered":false,"items":["€3,059 to €14,582 interest on €50,000 over ten years, depending on the year the loan began (2021 or 2003)","2.65 points average gap between the mortgage rate and the overnight deposit rate since 2003","49 of 284 months with the mortgage rate below inflation, all between 2017 and 2023","1% minimum reserve that euro area banks have held at the central bank since 2012"]},{"type":"heading","level":2,"id":"how-a-loan-creates-money","text":"How a Loan Creates Money"},{"type":"paragraph","text":"When a bank grants a loan of €50,000, it credits the amount to the borrower’s checking account. Two items appear on its balance sheet at the same time. On the asset side is the claim on the borrower, on the liability side the borrower’s new deposit. The borrower can pay with this deposit like with any other money in the account. It does not come from other customers’ deposits."},{"type":"paragraph","text":"When the borrower repays the loan, the money disappears again. Repayment destroys money just as lending created it. The Deutsche Bundesbank describes the process in its Monthly Report of April 2017, the Bank of England in its Quarterly Bulletin 2014 Q1. That is why most of the money supply consists of bank deposits and only a small part of cash."},{"type":"paragraph","text":"The principle is not new. In the 17th century, London goldsmiths already issued more receipts than they had gold in their vaults. The Bank of England was founded in 1694 to lend money to the English state for its war against France."},{"type":"heading","level":2,"id":"what-limits-money-creation","text":"What Limits Money Creation"},{"type":"paragraph","text":"Banks cannot create as much money as they like. If the borrower sends the money to someone who banks elsewhere, the bank has to transfer central bank money to that other bank. It has to obtain this money, for example from other banks or from the central bank. It pays interest for it."},{"type":"paragraph","text":"Rules set further limits. Since 2012, banks in the euro area have held a minimum reserve of 1% of certain deposits at the central bank. Capital rules under Basel III also apply, in the EU as a regulation. Under these rules, part of every loan has to be backed by the bank’s own capital."},{"type":"paragraph","text":"There also has to be demand. A loan only comes about if someone wants to borrow at the rate the bank asks. The bank also has to expect the loan to be repaid. The central bank influences the price through its policy rates. When they rise, loans become more expensive and less common."},{"type":"heading","level":2,"id":"who-bears-the-risk","text":"Who Bears the Risk"},{"type":"paragraph","text":"If a borrower does not pay, the bank loses its claim. By then, the money it credited has long been spent. The loss hits the bank’s capital. That is why banks check income and collateral before they lend. Their lending rate is also higher than what they pay for their own funding."},{"type":"heading","level":2,"id":"where-the-money-for-interest-comes-from","text":"Where the Money for Interest Comes From"},{"type":"paragraph","text":"A loan creates only the loan amount, not the money for the interest. Interest can still be paid, because the bank does not keep it. It pays salaries, rent, taxes, interest to savers and dividends to its owners. The money flows back into the economy, where borrowers can earn it again."},{"type":"paragraph","text":"The same euro can also make many payments over a year. So the money supply never has to be as large as all debts plus future interest. Loans default when incomes collapse or an investment does not pay off. Interest alone does not cause defaults."},{"type":"heading","level":2,"id":"what-loans-have-cost-since-2003","text":"What Loans Have Cost Since 2003"},{"type":"paragraph","text":"How expensive a loan turns out depends mainly on when it is taken out. The effective rate on new housing loans in Germany has ranged from about 1% to just over 5% since 2003. In August 2026 it stood at 4.00%. Banks paid 0.51% on overnight deposits at the same time. The ECB paid banks 2.25% on their deposits with it."},{"type":"paragraph","text":"On average since 2003, the mortgage rate was 2.65 percentage points above the overnight deposit rate. Out of this spread, banks cover their costs, loan losses and the return on their capital."},{"type":"paragraph","text":"Loading figure …"},{"type":"paragraph","text":"Rates on new housing loans and overnight deposits in Germany, with the ECB deposit facility rate."},{"type":"paragraph","text":"An amortizing loan of €50,000, a loan with a fixed monthly payment, shows how much the starting year matters. Repaid in full over ten years, it cost €3,059 in total interest when taken out in January 2021 at 1.19%. In January 2003 at 5.32% it was €14,582, and in January 2026 at 3.76% about €10,065. Consumer installment loans often cost much more. They are not part of this data."},{"type":"paragraph","text":"Loading figure …"},{"type":"paragraph","text":"Interest cost of a €50,000 loan over ten years by the year it was taken out."},{"type":"heading","level":2,"id":"inflation-and-debt","text":"Inflation and Debt"},{"type":"paragraph","text":"Inflation affects debt as well. A fixed-rate loan becomes cheaper in real terms when prices rise faster than the agreed rate. The borrower then repays with money that buys less than at the start. If inflation stays below the rate, the loan still costs money in real terms."},{"type":"paragraph","text":"Loading figure …"},{"type":"paragraph","text":"Mortgage rate minus inflation in Germany, monthly since 2003."},{"type":"paragraph","text":"In the data since 2003, the mortgage rate was below inflation in 49 of 284 months. All of them fall between 2017 and 2023. The gap was widest in October 2022, at 8.3 percentage points."},{"type":"paragraph","text":"With a fixed rate, the year the loan began decides a lot. A loan from January 2008 at 5.22% cost 3.83% a year in real terms, because inflation averaged only 1.39% over the following ten years. One taken out in January 2016 at 1.98% came to minus 0.87% in real terms. A loan from January 2021 at 1.19% stands at minus 3.12% so far. Banks build expected inflation into their rates."},{"type":"heading","level":2,"id":"borrowing-to-consume-borrowing-for-assets","text":"Borrowing to Consume, Borrowing for Assets"},{"type":"paragraph","text":"A loan for a car or a trip is repaid from the borrower’s regular income. A rented apartment or a business, by contrast, earns its own income, which can cover interest and repayment. Taxes differ as well. In Germany, interest on a rented property counts as an income-related expense (Werbungskosten), and a business deducts its interest as an operating expense (Betriebsausgaben). Interest on an owner-occupied home or a consumer loan does not reduce taxes."},{"type":"paragraph","text":"The loan works as leverage. It raises the return on the equity invested as long as the property’s return after all costs is above the loan rate. If the rate is higher, leverage lowers the return. If the value falls, the loss hits the equity first."},{"type":"paragraph","text":"An example with round numbers: an apartment costs €300,000, plus 10% in purchase costs. With €60,000 of equity, a 4% rate and 2% initial repayment, the payment is €1,350 a month. The apartment brings in €1,000 of net rent, and running costs take 20% of that. In the first year, income therefore covers 59% of the payment. The owner pays the rest from other income. The investment loan calculator works through such assumptions year by year, including the fixed-rate period, the follow-up rate and changes in value.","links":[{"text":"investment loan calculator","href":"https://alysly.com/tools/market-analysis/investment-loan-calculator/"}]},{"type":"heading","level":2,"id":"putting-it-in-context","text":"Putting It in Context"},{"type":"paragraph","text":"The same inflation works in opposite directions for savers and borrowers. What deposits lose in purchasing power, a fixed-rate loan loses in real burden. In the data since 2003, however, the real mortgage rate was negative in only 49 of 284 months. Most of the time, a loan cost money even after inflation."},{"type":"heading","level":2,"id":"r-tools-h","text":"Related Tools"},{"type":"paragraph","text":"Investment Loan Calculator","href":"https://alysly.com/tools/market-analysis/investment-loan-calculator/"},{"type":"heading","level":2,"id":"method","text":"Data and Method"},{"type":"list","ordered":false,"items":["Mortgage rate: the effective rate on new housing loans to households in Germany from the ECB interest rate statistics, monthly from January 2003 to August 2026. Consumer installment loans are not included; they usually cost more.","Overnight deposits: the ECB interest rate statistics for overnight deposits of households in Germany. ECB deposit facility rate: the rate banks receive on balances held at the central bank, as the end-of-month value.","Loan cost: a fully repaid annuity loan of €50,000 over ten years with monthly payments, at the rate of January in the given year, without fees.","Real mortgage rate: the mortgage rate of a month minus the inflation rate of the same month (HICP Germany, Eurostat). For fixed-rate loans: the rate at the start minus average inflation over the following months, for at most ten years and no later than the reference date.","The account of money creation relies on the Deutsche Bundesbank’s Monthly Report of April 2017 (“The role of banks, non-banks and the central bank in the money creation process”) and the Bank of England’s Quarterly Bulletin 2014 Q1 (“Money creation in the modern economy”). Tax statements refer to German income tax law as of August 31, 2026, without review of individual cases."]},{"type":"paragraph","text":"Every figure comes from our own price database and is produced by a script in the repository. Running it again with the same cutoff date returns the same numbers. Not investment advice."},{"type":"heading","level":2,"text":"Further Reading"},{"type":"list","ordered":false,"items":[{"text":"Paper Money and Inflation what inflation has cost since 1999","links":[{"text":"Paper Money and Inflation","href":"https://alysly.com/research/paper-money-and-inflation/"}]},{"text":"Investment Loan Calculator surplus, payment coverage and return on equity with custom assumptions","links":[{"text":"Investment Loan Calculator","href":"https://alysly.com/tools/market-analysis/investment-loan-calculator/"}]}]},{"type":"paragraph","text":"Embed this chart"},{"type":"paragraph","text":"The chart may be embedded with a visible source credit and a link to this page. 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Built on data we collect and keep current.","email":"mail@alysly.com","contactPoint":{"@type":"ContactPoint","contactType":"customer support","email":"mail@alysly.com","availableLanguage":["de","en"]},"address":{"@type":"PostalAddress","addressLocality":"Haltern am See","postalCode":"45721","addressCountry":"DE"},"founder":{"@id":"https://alysly.com/#founder"},"sameAs":["https://www.linkedin.com/company/alyslycom/","https://www.youtube.com/@alyslycom","https://x.com/alyslycom"],"publishingPrinciples":"https://alysly.com/methodology/","correctionsPolicy":"https://alysly.com/corrections/"},{"@type":"Person","@id":"https://alysly.com/#founder","name":"Alexander Bock","jobTitle":"Founder and data analyst","url":"https://alysly.com/about/","sameAs":["https://www.linkedin.com/in/abxk/"]},{"@type":"WebSite","@id":"https://alysly.com/#site","url":"https://alysly.com/","name":"Alysly","inLanguage":["de-DE","en-US"],"publisher":{"@id":"https://alysly.com/#org"}},{"@type":"WebPage","@id":"https://alysly.com/research/how-banks-create-money/#webpage","url":"https://alysly.com/research/how-banks-create-money/","name":"How Banks Create Money: What Happens When a Bank Lends – Alysly","description":"When a bank grants a loan, new money is created. 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