How does interest fit in here? Isn’t that what creates money AKA inflation?
Does the bank itself use its own money to pay off the debt (deleting some of their own money), or do they simply delete the debt?
In principle, it is 'the bank uses its own money to pay off the debt', as long as you accept that the bank's own 'credit worthiness reputation' and other assets count as 'money'. The hit is _ultimately_ taken by the capital shareholders in the bank, which is the important part.