Credit creation by the commercial banks?

Commercial banks create credit through the process of fractional reserve banking. When a bank receives a deposit from a customer, it is required to hold only a fraction of that deposit in reserve (usually around 10%) and can lend out the rest. This process allows banks to create new money in the form of loans, which in turn increases the money supply in the economy.

When a bank issues a loan, it creates a new deposit in the borrower's account, effectively increasing the money supply. This new deposit can then be used by the borrower to make purchases or investments, further stimulating economic activity.

However, it is important to note that this process also carries risks, as banks must ensure that they have enough reserves to meet withdrawal demands from depositors. If a bank lends out too much of its deposits and is unable to meet these demands, it can lead to a bank run and potentially a financial crisis. Central banks play a key role in regulating and overseeing the credit creation process to maintain stability in the financial system.