How can bank lending create a loan asset and a deposit liability?

When a commercial bank makes a loan, it can create a matching deposit rather than simply passing an existing saver’s deposit to the borrower. This is a balance-sheet event: the bank records a new claim and a new obligation at the same time.

From the bank’s perspective, the loan is an asset because the borrower owes repayment. The credited deposit is a liability because the bank owes that amount to its customer. In the fictional starting sheet, other assets are one hundred, deposits ninety and equity ten. A new ten-unit loan raises assets to one hundred ten and deposit liabilities to one hundred, while equity remains ten.

From the borrower’s perspective, the same deposit is an asset, but the loan obligation is a liability. Both rise by ten in the isolated example. Deposit creation therefore does not give the borrower ten units of net worth without an offsetting debt, nor does it give the bank new equity merely by entering the loan.

Bank deposits are distinct from central-bank reserves. This origination picture does not show new reserves being created or describe what happens when a payment moves to another bank. Those later transfers introduce funding and liquidity questions beyond the initial paired entries.

Lending is not unlimited. Creditworthiness, expected returns, capital, liquidity and monetary-policy conditions constrain actual decisions. The illustration explains why a loan and deposit can arise together without supplying a current regulatory formula or advice about borrowing.