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Money creation

The rise in money supply is called money creation. In the Eurosystem, only central banks can create central bank money, for instance, by granting a loan to a commercial bank or by purchasing an asset from a commercial bank and, in return, crediting the corresponding amount as a sight deposit to an account held with the central bank. Commercial banks can have their sight deposits in central bank money paid out in banknotes and coins - that is in legal tender - and pay this out to their customers in turn. When a commercial bank repays a central bank loan, the corresponding amount is deducted from the sight deposit on its central bank account; this process is called the destruction of money. Commercial banks can only create book money, not central bank money and thus no banknotes or coins. Commercial bank book money is created when a commercial bank grants a loan to or purchases an asset from a non-bank and this non-bank, in return, credits the corresponding amount as a sight deposit. The Eurosystem can influence and control the commercial banks' money creation through its monetary policy instruments. Banking supervision regulations also limit the creation of money by commercial banks.