It's statistical multiplexing essentially. To create a loan a bank performs the double entry book keeping operation: [debit loan, credit deposit] Which create

It's statistical multiplexing essentially. To create a loan a bank performs the double entry book keeping operation: [debit loan, credit deposit] Which creates a loan instrument on the asset side, and creates a matching deposit in the borrower's account. When the borrower repays capital on the loan, the operation is reversed. Old time banks would have a roughly 1:1 ratio of loans to deposits, these days because banks are also borrowing from other entities, that can ratio can get a bit squirrel.