The claim
"Banks take the money that savers deposit and lend it out to borrowers. The bank is an intermediary between savers and investors."
Why it sounds plausible
It matches everyday experience. You deposit money in a bank; the bank pays interest; it lends to someone else. It also matches the textbook "loanable funds" model, in which the interest rate balances saving and investment.
There is a kernel of truth: banks do channel funds from savers to borrowers, and deposits are a source of funding. But the causal story is wrong.
What actually happens
When a bank makes a loan, it creates a deposit for the borrower. The bank does not need to find a saver with idle cash first. The loan and the deposit are created together.[1]
| Bank assets | Bank liabilities |
|---|---|
| Loan: +$100,000 | New deposit: +$100,000 |
The bank's ability to do this is constrained by capital, liquidity, regulation, and the availability of creditworthy borrowers — not by a fixed pool of pre-existing deposits.
The nuance
Deposits still matter. They are a stable source of funding, and a bank that relies on flighty wholesale funding is more vulnerable. Deposits also affect liquidity and the cost of funding. But the direction of causation is not "deposits create loans." In the modern system, loans create deposits, and the bank manages its funding and liquidity afterward.[2]
James Tobin made a related point decades ago: the essential function of banks is not simply to intermediate existing funds, but to create money and to manage the associated risks.[3]
Why the myth persists
The intermediation story is useful for teaching the role of saving and investment. It is also politically convenient: if banks are merely intermediaries, their money-creation power is less visible. But a model that cannot explain where deposits come from is not a good guide to modern banking.
The correction
Banks create deposits when they lend. They do not lend out a fixed stock of saved deposits. They are constrained by capital, liquidity, demand for credit, and regulation — not by a pre-existing pool of loanable funds.
Sources
- McLeay, Michael; Radia, Amar; Thomas, Ryland. Money creation in the modern economy. Bank of England Quarterly Bulletin. 2014. View source Accessed Nov 11, 2026.
- Jakab, Zoltán; Kumhof, Michael. Banks are not intermediaries of loanable funds — and why this matters. Bank of England Working Paper 529. 2015. View source Accessed Nov 11, 2026.
- Tobin, James. Commercial Banks as Creators of 'Money'. Cowles Foundation Discussion Paper 159. 1963. View source Accessed Nov 11, 2026.