I'd say the steps go as follows ....
The loan account is credited simultaneously with the reserves or cash or hand account being debited.
If the borrower takes his money, either cash or as a deposit in another bank, the transaction is complete. In any case, the loan is complete.
If he deposits the money in the lending bank the reserves account is credited and the deposits account is debited. (Or vice-versa, one of the enduring mysteries of accounting).
You left out the debit to the reserves account (where the reserves account is the sum of the Fed reserve account plus cash on hand). This is the key step, money is not created out of nothing in a loan, it is debited from the reserves account.
Umm, no. It appears to me that you are confusing some terms. Reserves, cash, and outstanding loans are all assets. Assets are increased in the books through a DEBIT and decreased through a CREDIT. OTOH, depositor's accounts are LIABILITIES for the bank. Liabilities are increased by a CREDIT and are decreased by a DEBIT. Also, cash and some other current assets ARE reserves. The only important distinction is what is required and what is excess.
Let's start at the beginning with a very simple bank and an initial deposit of $10,000. We'll assume the bank keeps a "required reserves" account, though it is not required. We'll also assume the bank's desired reserve is 10%. Person A walks into the bank and makes a $10,000 deposit. Cash is debited or increased by $9,000. Required Reserves are debited or increased by $1,000. Person A's checking account is credited $10,000. The books balance because there is $10,000 in debits and $10,000 in credits. Total reserves are $10,000 ($9,000 excess and $1,000 required).
Person B comes into the bank and applies for a $9,000 loan. At the time of the loan, a demand account is created for Person B. The Loans Outstanding Account is debited or increased by $9,000. Person B's demand account is credited $9,000. Required Reserves are debited or increased $900 and Cash is credited or decreased $900. This last part of the transaction with the "Required Reserves" account is not necessary since cash is normally considered a reserve. I use it for illustrative purposes. Also, the loan transaction is complete at this point. Withdrawal of the funds is NOT required in order for their to be a loan though it does often occur at the same time.
At this point, the bank has assets of $19,000. Cash account of $8,100 plus Required Reserves (which is also cash) of $1,900 plus a loan outstanding of $9,000. The bank also has liabilities of $19,000 with the two depositor's checking/demand accounts of $10,000 and $9,000. Total reserves are still $10,000. Cash of $8,100 plus Required Reserves of $1,900.
Now, you might think the bank still has $8,100 in excess reserves and could continue to make loans. However, banks will typically not do this because they know that existing loans might be withdrawn at anytime. Therefore, banks will typically not continue to loan out money if their excess reserves match or drop below the amount of loans that have not been withdrawn.
At the end of the loan transaction, the borrower will often either request the loan funds as a withdrawal or the loan documents will specify who will be paid the loan funds for something the borrower has purchased. This initiates a second transaction. In our example, because there is a separate Required Reserve account, it requires crediting both Cash and Required Reserves. The transaction will be a debit or decrease to Person B's demand account of $9,000. There will be a corresponding credit or decrease to Cash of $8,100 and there will be a credit or decrease to Required Reserves of $900. It is only at this point that total reserves have changed after the initial deposit. Remember, total reserves were $10,000 after the deposit and total reserves were still $10,000 after the initial loan transaction. Now, after the loan proceeds have been withdrawn, total reserves are $1,000.
At this point, the bank has $10,000 in assets. ($9,000 loan outstanding and $1,000 Required Reserve or cash.) $10,000 in liabilities in the form of Person A's checking account.
Now, let's assume Person B's loan proceeds went to Person C and Person C deposits the $9,000 in the same bank. Cash is debited $8,100 and Required Reserves is debited $900. Person C's checking account is credited $9,000. The bank now has $19,000 in assets and $19,000 in liabilities. Assets are: $8,100 in cash or excess reserves. $1,900 in Required Reserves, and $9,000 in loan outstanding. Liabilities are: $19,000 in depositor's accounts. At this point, the bank could loan the $8,100 since the $9,000 loan has already been distributed.
That is a simple banking example. Again, the required reserves account is NOT necessary. You might see a similar account on the books of some banks and you might not. Sometimes, a bank will have a reserves account in the Stockholder's Equity section of the balance sheet. This is because that particular bank has decided to utilize some profit or paid-in capital from previous years to meet their reserve requirements. If that is the case, the accounting is a little bit different from the simple example provided above.
