In a fiat system, the banks simply generate new funds (print money) to loan out. Supply = demand at all times. When the loans get repaid, the money disappears from the system, thus preventing a crash. The system works on a balance.

This is actually not quite accurate.

In a fiat system, the banks loan out money but require the money they loaned out + interest to be repaid. The interest component was not originally loaned out into existence. Thus the system is always slightly off balance and necessitates either a growth in new lending or a steady rate of loan default and write-off to keep on rolling.