They get reserves from Central Bank not money. Your view of finance is incredibly simplistic. I dont think you know how that industry functions
Of course, but that is sufficient. The reserves and the imposed fractional ratio determine how much money a bank can create. You should maybe read the first chapters of the Treatise on Money by Keynes again ?
Simply said, if I'm bank A, and you're bank B, we can write loans to each other as much as we like, and those loans become created money. If there's no legal limit, two banks can create an infinite amount of money, by lending to each other. The reason being that the "debt certificate" that bank A holds of bank B, is considered an asset of bank A, and the "debt certificate" that bank B holds of bank A, is considered an asset of bank B. As such, by lending themselves, say, each, $ 100 000.- they have created two times $100 000.- of assets one another. Their balances are in check: they have each an "asset" (the other bank's debt) of $ 100 000.-, and they have each a debt of $ 100 000.- (as a bank account they opened for the other bank with $100 000.- on it). They can even ask interest. There's a cash flow due, and there's a cash flow coming in.
Now that they have their balances in check, and they have money (that is, the bank account in the other bank with $100 000 on it), they can lend it out to, say, someone needing a mortgage. They then ask that person 3% interest on it. If bank A lends out its freshly created $100 000,- to Joe, who wants to buy a house, by writing him a cheque on the other banks' account and then Joe has to give them $ 3000.- a year.
So on Monday, Bank A didn't have a dime. On Tuesday, Banks A and B do their money-creating swap. On Wednesday, bank A loans its money to Joe. Now, bank A has an income of $3000.- a year. Its balance is still in check. It has no dime, but it has a debt to bank B of $ 100 000.- and it has a mortgage contract worth $100 000.- with Joe. Its balance is in check.
Bank B will do the same.
On Thursday, the directors of bank A and B meet in a bar, and decide to start over next Monday....
As such, they generate each an income of about $ 3000.,- a week, as long as they find mortgage customers...
They can do the same with a mutual loan of $ 1000 000.- or even $ 1000 000 000.- or ....
But in reality, they can't because there's a legal limit: their reserves. It was Keynes' (correct) argument to require a reserve and a reserve ratio by law, to avoid the "runaway" of banks creating money.
Suppose that the reserve ratio is 5%, and bank A and bank B manage to have $ 1000 000.- each as a reserve deposit. That means that they can now play that game until they have about $ 20 000 000.- of customer bank accounts (of the other bank, say ;-) ) and lending out $ 20 000 000.-
They cannot "go party" with $ 20 000 000.- because they have to have their balances in check. It is not that they can SPEND that money. But they can LOAN that money, and invest it and they don't need a high return on it. If their reserve COSTS them, say, 1%, and they can obtain even 0.5% on the $ 20 000 000.- they work with, then they make sheer benefit even though they invest badly.
Indeed, the 1% on their reserve costs them only $ 10 000, and the 0.5% on the $ 20 000 000 brings them $100 0000 !
So IF you can obtain reserves, you can create money. And if you can create money, you obtain the interest on it "for free". You cannot spend the money itself, but you can spend the interest, which you do get for free.
When banks get into problems is when they screw up so badly that they LOSE money, and that they loose their $ 20 000 000.-
The trick of "pumping money" with banks is to use the reserve fraction ratio as a leverage on the interest: if you get $ 1000.- more reserves, you can play with 20 000 or so. So you only need to generate a return on those 20 000 that is 20 times smaller than the cost of your 1000 in order to break even. If you become greedy, and you start doing risky things with those 20 000, then you might be very rich, or you might be in deep shit if it goes wrong.