The total amount of bank deposits has nothing to do with the saving attitude, or with the spending decisions, of bank accounts’ holders. A new bank deposit can only be created through two main channels. In one, deposits are born twins with bank loans to the non-bank private sector (households or firms). In the other, deposits are born twins with bank reserves as a result of payments made by the public sector (Treasury or Central bank) to the non-bank private sector. A third process, yet smaller in importance, is when the banking sector makes net payments to the non-bank private sector.

The bank loan channel: This is when a bank makes a new loan.

Once the new balance is made available to the client-borrower, this will increase the total deposits in the banking system. By the end of the day, the banking system has more loans in its portfolio (assets) and more deposits to honor (liabilities), while the non-bank private sector has more deposits (assets) and more loans due (liabilities). In the process, the total amount of reserves held by the banking system has not changed.

Conversely, the total amount of deposits declines when the non-bank private sector makes any payments to a bank (such as interest payments, loan principals, or a purchase of a bank product).

Thus, for any time period, the net creation of deposits through this channel equals the amount of bank loans made to the non-bank private sector net of principals and interests payments received.

Public sector’s payment channel: This is when the public sector sends a check to the non-bank private sector.

If the check is issued by a national state with monetary sovereignty (i.e., the unit of money issued is a national state liability not pegged to any other asset the nation state must hold as guarantee), than the check will never bounce. When the non-bank private sector’s recipient deposits the check, the banking system acquires an equivalent amount of reserves via a credit entered by the central bank. By the end of the day, the banking system has more reserves (assets) and more deposits to honor (liabilities), while the non-bank private sector has more deposits (assets).

Conversely, the total amount of deposits declines when the non-bank private sector makes any payments to the public sector (such as taxes, or purchases). Thus, for any time period, the net creation of deposits through this channel equals the amount of all government and central bank net payments.

The banking system net factor: This is when a bank makes a payment to the non-bank private sector for reasons other than making loans, such as payments of salaries to bank employees, rents paid to landlords, interests paid to depositors, dividends paid to shareholders, and any other outlays (for current output, existing real assets, or outstanding financial assets). By the end of the day, the banking system has settled a number of its liabilities by creating deposits in the name of the payees, and the non-bank public has more deposits (assets).

Conversely, the total amount of deposits declines when the non-bank private sector makes any payments to the banking system (such as fees).

Thus, for any time period, the effect of this channel equals the outflow of funds of total banks’ expenses net of total banks’ receipts.

No, it never does. The total amount of deposits in the banking system cannot change as a result of spending decisions by households or firms (technically, the “non-bank private sector”). Spending decisions can only move deposits from one account to another, and cannot cause a change in overall deposits.

When a private entity spends, it instructs a bank to transfer a balance from its own account to somebody else’s account. When a private entity saves, it simply refrains from spending out of its owned deposits. An increase, or a reduction, of overall spending in the economy will increase, or reduce, the amount of payments banks must settle but will not change the total deposits amount.

Even portfolio reallocation decisions do not change the total amount of deposits. Consider, for example, a tendency to sell stocks at current market prices: Those who sell stocks will receive deposits from the buyers (you can only sell if there is a buyer!), and again the net total is being unchanged. If the selling tendency is generalized, buyers of stocks will offer declining prices for stocks, and by the end of the day stock prices are lower with an unchanged overall deposits amount.

Not even cross-border transactions can change the total amount of deposits in any national banking system: they only shift property of funds between domestic and foreign depositors. When a payment from ‘abroad’ is received, for example, a balance is transferred from the account (in the domestic banking system) in the name of a foreigner to the account (in the same domestic banking system) in the name of a resident.

Conclusion: The overall amount of deposits does not depend on spending decisions by the non-bank private sector.