ELI5 How can banks loan more money than they own?

Imagine a toy town with a toy bank. People put their toy coins into the bank for safekeeping. The bank does not just lock all the coins in a box. If it did that, the coins would sit there doing nothing, and the town would not grow.

Instead, the bank notices something important. Not everyone comes to take their coins back at the same time. Most people only need a little at a time. Because of that, the bank keeps some coins ready, but it lends the rest to people who want to build houses, open shops, or buy tools. Now here is the key idea. When the bank lends money, it does not always hand out the same physical coins it received. Most money today is just numbers in computer accounts. When the bank gives a loan, it creates new numbers in the borrower’s account. Those numbers can be spent like real money. This makes it look like the bank has loaned out more money than it owns in actual coins.

This system is called fractional reserve banking. It simply means the bank only keeps a fraction of the money on hand and lends the rest. For example, if the bank has 100 coins, it might keep 10 ready and lend out 90. The person who borrows 90 coins might pay someone else, who then puts that money into their own bank. That bank can lend most of it again. The same original coins now support many loans. This is not magic and it is not cheating. It works because trust exists. People trust that the bank will give them money when they need it. They also trust that most other people will not rush to withdraw everything at once.

Banks are also tightly watched. Rules tell them how much they must keep in reserve. Central banks stand behind them and can lend money in emergencies. This helps prevent panic and collapse. Why do we do this at all? Because it helps the economy grow. Loans help people buy homes, start businesses, and pay for education. If banks could only lend exactly what they physically had, lending would be very small. Growth would be slow. Jobs would be fewer. So banks can loan more than they own because money is mostly digital, not physical. Because not everyone needs their money at the same time. And because rules and trust hold the system together. It sounds strange at first, but it is one of the main engines that keeps modern economies moving.