Credit Creation

When banks give out loans, it creates credit in the economy.

The banks balance sheet before a loan looks like this

After credit creation

You can see that it creates assets for the bank, as well as new liabilities. The bank now has loans, which are worth money, as well as the consumer having money available.

Credit Creation diagram

When people take out loans, they either put the money in the bank, in which case it goes to the bank, or they spend it, and it ends up in another bank / the same bank. So banks create credit.