Part 4/13:
When a bank grants a loan, it records an asset (the loan) and a liability (the deposited money). If the borrower defaults and the bank cannot recover the loan, it writes off the asset as a loss. However, because the money was initially created out of nothing, and costs the bank little more than administrative overhead, the actual tangible loss to the bank is minimal—primarily a bookkeeping adjustment. The bank’s equity diminishes, but the system's design ensures that the costs of bad loans are often socialized, transferred via government intervention.