When a bank issues a loan to me, the money is created out of nothing on a computer. It's just a record in a database. It doesn't exist. The bank issuing the loan needs to have reserves at the central bank, but they only account for 2% of the loan amount (at least that's what's in most European countries). So basically 98 percent is created on the spot, out of nothing.
Now my question is this. Assuming there is no bank run so that everyone goes out and depletes the real money deposits the bank has, if people stop paying their loans how can the bank go bust when that money didn't exist in the first place?
If you pay back your loan plus interest, the principal disappears just like it appeared, out of nothing, and the bank keeps the interest money as its profit. So if people don't pay back their loans why can't that money just disappear and all remain fine and dandy?