Certified Financial Management Specialist Practice Exam

In the banking process, what do banks create as a result of the money creation process?

1. Debt

2. Equity

3. Money

4. Assets

The correct answer is: Money

During the money creation process in banking, banks primarily create money through a mechanism known as fractional reserve banking. When banks receive deposits, they are required to keep a fraction of those deposits in reserve and are allowed to lend out the remainder. This lending process effectively increases the total supply of money in the economy. When a bank issues a loan, it does not physically hand out the deposited cash; instead, it credits the borrower's account with the loan amount, which is considered new money. This newly created money can be spent or deposited again, leading to a multiplication of the monetary base through further loans and deposits. Thus, in this context, the primary outcome of the money creation process is the creation of money itself, rather than just increasing debt levels, creating new equity, or generating new assets on the bank's balance sheet. The essence of this process underscores the role of banks in facilitating liquidity and enabling economic transactions by increasing the money supply.