What stops banks from claiming they control more money then they actually do?


Since most money are just electronic with no real bank note behind them, what stops some bank from just adding Billion dollars for their accounts and use it for trading? If the answer is in some form of government regulation/oversight.. what about banks in high-corruption countries who still trade with ‘west’?

Are all electronic money traceable to some central bank/state who send it to the circulation?

In: Economics

Accounts are kept in a “double entry system” and each financial entity keeps a record of their accounts which include transactions with other entities. Banks, in particular, also have to keep an account with the Central Bank (the Fed in the USA). For ELI5 purposes, these entries in these accounts have to balance. Meaning one cannot simply add a number to one account, it needs a corresponding balancing entry. And since some (many) of these accounts have their counterparts in another entity, these entries need to match.

Simple example: If bank A owes bank B $1000 dollars. Bank A records this as a $1000 borrowing from bank B while bank B records this as a $1000 loan to bank A. Neither party can simply adjust the balance on their own account since their counterpart accounts won’t match.

Because of these independent systems, with many parties involved all keeping track of each others transactions, it is not simple to “add money to my account” – it would be fairly quickly discovered as a mismatch and the offending entries highlighted.

Let’s say I pay you £100 and we’re at different banks.
What actually happens is my bank sends £100 from there account at the central bank to your banks account, along with a log saying which account it’s for and from.

The money at the central bank and in physical currency is the only currency in circulation.

The money in the accounts we have with commercial banks isn’t actually currency, it’s a list of assets and liabilities, so my account with £100 is my asset and my banks liability (if I tell them to send it to your bank they better have the currency in their account to do it).

If the bank decide to say on their own system they have an asset of £10,000,000,000 it doesn’t change anything (although probably breaks a lot of regulations), when someone tells them to send money they still only have what’s in their account at the central bank.

The Federal Reserve banks just print money whenever the government tells them to in the US. That 2 Trillion dollar stimulus bill didn’t come from additional taxes – yet.