Who regulates the balancing of the books for commercial banks? How? Is it public information?

Question

I've just read Money Creation in the Modern Economy, an article published by the Bank of England. This article brings about a lot of questions in my mind. This article talks about money being created through commercial bank loans, and that central banks only have the authority to set interest rates or to employ quantitative easing in order to stimulate the economy. Loans being repaid should theoretically destroy the money that was created and balance the books, but inflation grows in that economy as banks earn interest (and in this case, the interest is actually the money that never existed, assuming that they destroy the rest of the money paid back). So my questions are:

1. How is this all regulated? Who regulates the balancing of the books?

This must require a lot of regulation in order to be feasible, because there are many commercial banks, but few central banks, and because central banks lack power. E.g. central banks can only set interest rates thus defining the theoretical inflation rate, or buy assets through quantitative easing.

2. What's stopping a commercial bank from making a deposit into someone's bank account that isn't on the books or what's stopping them from not destroying the money they get paid back from loans?

3. Can I find out more about this stuff for each bank? In other words, is this public information or not?

Answer 1

It's public information, and you can take courses, and even university degrees in it.

The double entry book keeping technology used by banks is essentially designed to tackle exactly this problem, and all banks and commercial customers use it. The system itself provides a single error detection/correction mechanism, that guards against human error, and also originally required updates in two separate books, maintained by two separate clerks - which was deliberately done to make fraud more difficult. Essentially if the books don't balance, this is a red flag to find the mistake/fraud that caused this to occur and correct it. These days it's all computerised, but the underlying operations are identical.

The entire accountancy profession's job, is essentially to supervise this process, and periodically audit both banks and companies in order to make sure that the books are balanced, and that nothing illegal is being done.

Answer 2

Banks are often very regulated and are required to follow the rule of law. Putting money into accounts not on the books is fraud and, due to the nature of double entry accounting, not that easy.

This wiki has a list of regulatory authorities which purport to keep the banks honest. The trust in the system has taken a few hits since the GFC and the idea of too big to fail etc.

Short answer, the law stops the banks from doing some of the things that you suggest and as with any industry, some people will break it.

Answer 3

This doesn't require regulation in order to be feasible.

When a bank makes a loan it adds to the borrowers deposits on its books. The borrower will spend the borrowed deposits on whatever they needed the loan to buy like a building or machinery. This spending will involve the lending bank transferring assets to other banks, the banks of the borrower's suppliers. If a bank expands deposits through lending too far it will run out of assets that other banks will accept in payment. This is a form of bank failure.

For more see https://oll.libertyfund.org/title/white-the-theory-of-free-banking-money-supply-under-competitive-note-issue