What matters in the banking system are capital requirements. The amount of money a bank can lend out is a multiple of the bank's capital, because when a loan d

What matters in the banking system are capital requirements. The amount of money a bank can lend out is a multiple of the bank's capital, because when a loan defaults, the corresponding amount is subtracted from the bank's capital, i.e. from the net value of the bank (assets minus non-capital liabilities). We as society want to limit the amount of loans that a bank can make to such an extent that its bank capital won't go negative. Because if bank capital were to go negative, the bank would be in default and would effectively have given money out "for free". And banks are limited exactly in this way: Loans are limited in terms of the amount of capital that banks owe their owners. You may argue that the capital requirements are too low (and they are...), but qualitatively, the system makes sense. It actually makes much more sense than this foggy picture of reserve banking that most people have in their heads.