Bank's Profit Motive for Lending

A commercial bank issues a new $50,000 loan to a customer by crediting the customer's deposit account. Which of the following statements accurately describes the immediate effect on the bank's balance sheet at the moment the loan is created?

Explaining the 'Self-Financing' Loan Creation Process

When a commercial bank originates a new loan for a customer, the bank's net worth immediately increases because the loan represents a new income-generating asset on its balance sheet.

Analyzing a Bank's Balance Sheet After Loan Creation

A commercial bank approves and issues a new loan to a business. Match each component of the bank's balance sheet with the immediate effect of this transaction at the moment it occurs.

When a commercial bank creates a new loan, it simultaneously creates a new asset (the loan) and a new liability (the borrower's deposit) of equal value. Because these two entries perfectly offset each other on the balance sheet, the bank's ________ remains unchanged at the moment of the transaction.

An economics student provides the following explanation for how a commercial bank issues a new loan: "When a bank approves a $100,000 loan, it must first check its vault or reserve account to ensure it has $100,000 in available funds. It then transfers these funds to the borrower's account. This action creates a new loan asset for the bank, but its cash reserves decrease by the same amount, so the bank's net worth doesn't change."

Which statement below best identifies the primary error in this student's explanation?

Evaluating Models of Bank Lending

An economics student claims, "A commercial bank with $50 million in existing customer deposits can only lend out a maximum of $50 million, because it can't lend money it doesn't have." Which of the following statements best evaluates this claim based on the mechanics of how a bank's balance sheet operates during loan creation?

A commercial bank finalizes a new loan agreement with a customer. Arrange the following events to accurately describe the logical sequence of the transaction on the bank's balance sheet at the moment the loan is created.