The person that received the $850k loan spent it, so their balance is then $0 and the bank also has a corresponding entry for -$850k of debt that they are owed and can collect interest on.
The debt is an asset held by the bank until it is paid off, is sold, or is defaulted on.
Person A deposits $1M
Person A $1M, total deposits on hand = $1M
Person B takes $850k loan
Person A $1M, Person B $850k, Person B -$850k debt
Total deposits on hand is STILL only $1M. The combined balances are 1.85M but these are just entries that have no impact on what is actually in the bank's vault/account.
If A and B both ask for their entire balance at that moment the bank will have to go to the overnight window or some other facility to take a short-term loan that it will owe interest on and may need to provide collateral to receive.
In that case the bank's overall balance sheet would be $-850k of debt it owes someone. Because that debt isn't collateralized their rate will probably be higher. This is what led to things like the credit market freeze up that the Fed needed to step in to provide liquidity for. Banks usually borrow from each other not just the Fed, but when shit hits the fan banks might not be willing or able to loan to each other except at extremely high rates.
When the bank repays its loan (perhaps when Person C is paid by B and deposits the money into their account) the situation will unwind and we'll be back to the previous situation.
In real life it's much more complicated because the bank probably has many other types of assets like CLOs, CDOs, etc.
Sometimes the Fed will take assets as collateral for a loan and the bank is expected to repurchase it later at a slightly higher price a/k/a the Repo market
The debt is an asset held by the bank until it is paid off, is sold, or is defaulted on.
Person A deposits $1M
Person A $1M, total deposits on hand = $1M
Person B takes $850k loan
Person A $1M, Person B $850k, Person B -$850k debt
Total deposits on hand is STILL only $1M. The combined balances are 1.85M but these are just entries that have no impact on what is actually in the bank's vault/account.
If A and B both ask for their entire balance at that moment the bank will have to go to the overnight window or some other facility to take a short-term loan that it will owe interest on and may need to provide collateral to receive.
In that case the bank's overall balance sheet would be $-850k of debt it owes someone. Because that debt isn't collateralized their rate will probably be higher. This is what led to things like the credit market freeze up that the Fed needed to step in to provide liquidity for. Banks usually borrow from each other not just the Fed, but when shit hits the fan banks might not be willing or able to loan to each other except at extremely high rates.
When the bank repays its loan (perhaps when Person C is paid by B and deposits the money into their account) the situation will unwind and we'll be back to the previous situation.
In real life it's much more complicated because the bank probably has many other types of assets like CLOs, CDOs, etc.
https://www.investopedia.com/ask/answers/040715/what-differe...
Sometimes the Fed will take assets as collateral for a loan and the bank is expected to repurchase it later at a slightly higher price a/k/a the Repo market
https://www.bankrate.com/banking/federal-reserve/why-the-fed...