When you transfer money from one bank to another, are they just moving virtual bits around? Is anything backing those transfers? What prevents banks from just fudging the bits and “creating” money?

Question

When you transfer money from one bank to another, are they just moving virtual bits around? Is anything backing those transfers? What prevents banks from just fudging the bits and “creating” money?

In: 1559

Answer 1

I actually know this one! Caveat: My background is in European (SEPA) Banking. While I believe the fundamentals will be similar everywhere, I can’t promise it works exactly that way everywhere (eg in the US).

When money is sent from your account, the sending bank writes it on a long list of all transfers they do in this sending window. When the sending time comes, they send the list to the clearing bank, who then takes all the rows to Bank X from all the files it received, puts it into a single list and sends it to Bank X for crediting to their customers. This is the clearing (=exchange of information) part.

Next comes settling. The clearing bank looks at all the transfers made from Bank X to Bank Y and from Bank Y to Bank X and nets them. So Bank X sent 100m to Bank Y and Bank Y sent 30m to Bank X? Then Bank X actually sends 70m to Bank Y.