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".

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.

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RELATED FAQS
  1. What is the difference between the deposit multiplier and the money multiplier?

    The terms "deposit multiplier" and "money multiplier" are often confused and used interchangeably, because they are very ... Read Full Answer >>
  2. How much does M1 enhance the multiplier effect of fractional reserve banking?

    M1 is a strict definition of money that includes only currency, travelers' checks and checking accounts. Fractional reserve ... Read Full Answer >>
  3. How do commercial banks us the 'money multiplier' to create money?

    In a fractional reserve banking system, commercial banks are permitted to create money by allowing multiple claims to assets ... Read Full Answer >>
  4. How do central banks acquire currency reserves and how much are they required to ...

    A currency reserve is a currency that is held in large amounts by governments and other institutions as part of their foreign ... Read Full Answer >>
  5. How does a bank determine what my discretionary income is when making a loan decision?

    Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>
  6. What net interest margin is typical for a bank?

    In the United States, the average net interest margin for banks was 3.03% in the first quarter of 2015. However, this was ... Read Full Answer >>

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