Fractional Reserve Banking

Loading the player...

What is 'Fractional Reserve Banking'

Fractional reserve banking is 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".

BREAKING DOWN '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.

RELATED TERMS
  1. Bank Reserve

    Bank reserves are the currency deposits which are not lent out ...
  2. Bank Run

    A situation that occurs when a large number of bank or other ...
  3. Fractional Ownership

    Percentage ownership in an asset. Fractional ownership shares ...
  4. Fractional Share

    A share of equity that is less than one full share. Fractional ...
  5. Bank Deposits

    Money placed into a banking institution for safekeeping. Bank ...
  6. Bank Insurance

    A guarantee by the Federal Deposit Insurance Corporation (FDIC) ...
Related Articles
  1. Economics

    What is Fractional Reserve Banking?

    Fractional reserve banking is the banking system most countries use today.
  2. Investing

    Why Banks Don't Need Your Money to Make Loans

    Contrary to the story told in most economics textbooks, banks don't need your money to make loans, but they do want it to make those loans more profitable.
  3. Personal Finance

    The Banking System: Commercial Banking - Economic Concepts in Banking

    ByStephen D. Simpson, CFA Banks both create and issue money. While commercial banks no longer issue their own banknotes, they are effectively the distribution system for the notes printed, and ...
  4. Insurance

    How the Federal Deposit Insurance Corporation (FDIC) Works

    Learn more about the Federal Deposit Insurance Corporation (FDIC) and what happens to your deposits over $250,000 if a member bank fails.
  5. Investing Basics

    What is a Bank?

    A bank is a financial institution licensed to receive deposits or issue new securities to the public.
  6. Personal Finance

    The Banking System: Commercial Banking - How Banks Make Money

    ByStephen D. Simpson, CFA As mentioned before, banks basically make money by lending money at rates higher than the cost of the money they lend. More specifically, banks collect interest on ...
  7. Investing Basics

    Retail Banking Vs. Corporate Banking

    Retail banking is the visible face of banking to the general public. Corporate banking, also known as business banking, refers to the aspect of banking that deals with corporate customers.
  8. Personal Finance

    The Banking System: Commercial Banking - Business Lending

    ByStephen D. Simpson, CFA Commercial lending - lending to businesses - is really a two-tier market in the United States. At the level of large corporations, bank lending is not as significant ...
  9. Economics

    Inside National Payment Systems

    Investopedia explains: The global interconnection of U.S. payment systems makes commerical and financial transfers possible.
  10. Personal Finance

    The Banking System: Commercial Banking - Key Ratios/Factors

    ByStephen D. Simpson, CFA As banks have very different operating structures than regular industrial companies, it stands to reason that investors have a different set of fundamental factors ...
RELATED FAQS
  1. How do commercial banks us the 'money multiplier' to create money?

    Find out how commercial banks can expand the supply of money in an economy through the fractional reserve system, otherwise ... Read Answer >>
  2. What economic indicators are important to consider when investing in the banking ...

    Find out which economic indicators are most useful for investors in the banking sector, especially those influenced by central ... Read Answer >>
  3. What role did the Great Depression play in developing America's bank reserve policies?

    Learn about the changes to the Federal Reserve system and bank reserve laws in the United States in the aftermath of the ... Read Answer >>
  4. Why do commercial banks borrow from the Federal Reserve?

    Learn how commercial banks borrow from the Federal Reserve to meet minimum reserve requirements, and discover the pros and ... Read Answer >>
  5. What are the Federal Reserve's guidelines on demand deposit accounts?

    Read about some of the Federal Reserve's requirements and guidelines regarding the treatment, safeguarding and processing ... Read Answer >>
  6. What is the difference between a demand deposit and a term deposit?

    Understand the meaning of demand deposits and term deposits, and learn about the major differences between these two types ... Read Answer >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center