A balance sheet lists what an entity owns (assets), what it owes (liabilities), and the residual claim of its owners (equity). Assets equal liabilities plus equity.

Money creation is a balance-sheet event. When a bank makes a loan, it adds a loan asset and a deposit liability at the same time. When the loan is repaid, both shrink.[1]

The composition of a bank's balance sheet — especially its leverage and liquidity — determines how sensitive it is to shocks.[2]

Sources

  1. McLeay, Michael; Radia, Amar; Thomas, Ryland. Money creation in the modern economy. Bank of England Quarterly Bulletin. 2014. View source Accessed Nov 11, 2026.
  2. Admati, Anat; Hellwig, Martin. The Bankers' New Clothes: What's Wrong with Banking and What to Do about It. Princeton University Press. 2013. View source Accessed Nov 11, 2026.