Many people find it hard to accept this concept because it defies the basic teachings of mainstream theory, as they learned it in school.
But take a step back, and look at loans and deposits, and how they come about. You want to borrow money from a bank so you can buy a car from me. Your bank does not have to have the funds to lend you when it funds your loan. All it has to do is go and borrow from the central bank’s deposit window, or otherwise borrow from the interbank market.
Your bank (which lends you the money) credits your account with the amount. You then take the money, go and buy the car from me, and I deposit the amount in my bank. My bank now has money to lend to your bank, so it can pay off its loan from the central bank.
Same thing if I want to buy a house from you. My bank simply credits me the funds, then I go and pay you with the amount, you deposit it into your bank. My bank now has a loan, and it can borrow the funds it lent me from your bank, which now has additional deposits, which has now circuited from me to you then to them, when my bank lent me the loan.
If no bank lent anyone any money, where would any of us get the additional deposit to put in the bank? And without new deposits, which the mainstream claims funds bank loans, how do banks manage to keep loans growing? This is beyond fractional reserve banking, which as a concept means the bank takes a fraction of its deposits and lends out. If banks were constrained by fractional reserve banking, bank lending growth would have slowed to a crawl (or standstill) long ago.
Banks do not need deposits at all to fund loans. The presence of the central bank discount window which bridges any unfunded loans enables them to simply fund any creditworthy client with the funds, knowing that they will always be able to fund it. All they need is to make sure they charge you higher than their cost to borrow, and that they have the (usually Basel-recommended) capital ratio to back the loan.
What is true for a two-bank economy is true for an economy that has several banks, many borrowers, and many depositors. Loans have to be made by some bank first before anyone else can get any money to deposit. Neither you nor I are allowed to print counterfeit money just because we want to increase our deposits. We need to borrow it, or sell a good or service to someone who does. Banks do the rest.
