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That's exactly how central bank lending works. You have a fallacy of composition. In reality the central bank doesn't lend to banks. The banks lend to each oth

• reese_john 4y ago
  > In reality the central bank doesn't lend to banks. Central banks absolutely do lend to banks through discount window lending and other means. > The commercial banks have accounts with each other. That's what interbank lending is, and what they clear to at the end of the day. > In Bank A it is DR Bank B, CR Customer 2 Deposit. In Bank B it is DR Customer 1 Loan, CR Bank A. They can't clear interbank payments unless that happens.[1] There is not a one true way to do interbank lending, since it depends on regulation and the underlying market infrastructure used - therefore it is not a fact that banks arbitrarily 'create money' to do so. Banks can lend to each other using central counterparty clearing houses (CCP) as intermediates, in that case, Bank A and Bank B will have accounts with the CCP, who will do all the clearing & settlement.