Most people believe that when banks make loans they take money from people’s savings or other assets and lend to borrowers. Which make banks more or less intermediaries moving money from one source to another, and then they charge interest to cover costs and earn a profit.
However in reality once a loan officer at the bank is satisfied that the borrower will pay the loan amount back plus interest. The bank simply types this money into existence and is allowed to charge interest on it. This money doesn’t come from anywhere; it is brand new digital money that can be converted to cash if the borrower wishes. Money needs to come from somewhere and commercial banks have been given that privilege by parliament. In fact approximately 97.5% of all money in Canada is created in this way, the other 2.5% is created as hard currency. The bank notes are printed by Ottawa-based private sector security printer Canadian Bank Note Company, Ltd.; the coins are produced by the Royal Canadian Mint.
In Canada when the topic of money creation is addressed in macroeconomic textbooks it is both inaccurate and outdated. The most commonly accepted method of money creation by economists is the money multiplier model. In the money multiplier model a bank must hold a certain percentage of reserves relative to the amount of money a commercial bank can create. However in Canada reserve requirements were phased out between June 1992 and June 1994 as a result of the 1991 Bank Act. It is up to the banks discretion how much cash they keep on hand for their daily business requirements and no specified reserves are required. If fact currently commercial banks do not even have a header for reserves on their balance sheets.