For example, a gram is a precise weight recognised and understood world-wide. Therefore commodity currencies are a constant, easily understood, and readily acceptable form of money. These differences in the quality of bank portfolios can be ranked and managed to some extent, but they still add extra complexity, cost and uncertainties that do not exist with commodity currencies. Generally speaking, fiat currencies exist only because they have been put into circulation by government edict, not because they are better or hold more value than commodity currency. Fiat currencies are based on an obligation to repay a debt.
Banks create dollar currency by extending credit to their customers.
If a bank extends too many non- performing loans, the quality of its balance sheet can be seriously impaired. This can create systemic effects that could jeopardise the financial stability of other banks. Payment risk is the risk that a transaction between two parties fails, leaving the payee without the promised funds. Banks are generally careful about credit risk, but the risk cannot be eliminated. Inevitably some loans will not be repaid, and during economic downturns the number of unpaid loans usually increases.