Fractional Reserve Banking

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DEFINITION of 'Fractional Reserve Banking'

A banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties. Most countries operate under this type of system.

Also known as "fractional deposit lending".

INVESTOPEDIA EXPLAINS 'Fractional Reserve Banking'

Many U.S. banks were forced to shut down during the Great Depression because so many people attempted to withdraw assets at the same time. Today there are many safeguards in place to prevent such an instance from occurring again, but the fractional-reserve banking system remains in place.

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