Relying on theories in which bank loans create deposits — a process we call “funding liquidity creation” — we measure how much funding liquidity the U.S. banking system creates. Private money creation by banks enables lending to not be constrained by the supply of cash deposits. During the 2001–2020 period, 92 percent of bank deposits were due to funding liquidity creation, and during 2011–2020 funding liquidity creation averaged $10.7 trillion per year, or 57 percent of GDP. Using natural disasters data, we provide causal evidence that better-capitalized banks create more funding liquidity and lend more even during times when cash deposit balances are falling.View the Full Working Paper
Funding Liquidity Creation by Banks
WP 23-02 – A large amount of private money can be created through banks’ lending activities. This paper provides some empirical evidence for the banks’ role in money creation.