Bank Funding, Credit Money Creation, and Loanable Funds

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I had a sleepless night; among the things that went through my mind may be the solution to a puzzle that had been detracting me during the past weeks.

I had been confused about the need for banks to fund themselves. I thought erroneously that this need was tantamount to their having to fund the loans that they extend. In this way, it appeared that I had vindicated the loanable funds theory.

I think, this is the true situation: What a bank has to fund is its ability to operate profitably. It does not need other people's money to extend loans. Funding is required to maintain operations and through these economic viability as a company.

How does a bank achieve profitability?

The most simple way to outline 

§ the way in which a bank ensures profitability is by paying a lower rate to the sources of its funding than it receives from income earned (largely by extending loans).

Depositors happen to be the cheapest source of funds, while credit users (by paying interest and fees) provide the bank with income in excess of the bank's funding costs.

The upshot: deposits are not needed by banks to have funds to lend out; the latter a bank can originate ex nihilo and in principle ad infinitum, provided that condition § is not violated.

So it is true, after all: the loanable funds theory offers a wrong description of what is requires for a bank to be able to extend loans.

See also my Banks Are Ex Nihilo Creators of Money, What Keeps Them from Issuing Money Ad Infinitum?