Fractional-reserve banking
- 1Banks keep only a fraction of deposit liabilities as liquid reserves.
- 2Lending out the remainder of deposits increases the total money supply.
- 3Reserves are held as cash or as balances at the central bank.
- 4The system differs from full-reserve banking, which requires holding all depositor funds.
Fractional-reserve banking is the system of banking under which banks that take deposits from the public keep only part of their deposit liabilities in liquid assets as a reserve, and lend a percentage to borrowers, thus increasing the money supply by the loaned amount.
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the process through which commercial banks expand money supply
Through fractional-reserve banking, commercial banks create money by lending out a portion of their deposits, which significantly expands the total money supply beyond the base currency.
Fractional-reserve banking is a system where financial institutions maintain only a portion of their total deposit liabilities as liquid reserves. The remaining funds are lent out to borrowers, a process that effectively expands the money supply within the economy.
Fractional reserve system, money multiplier example. Created with OpenOffice.org Calc based on the work of AnaloguniWikimedia Commons; CapEnt; Own work; Public domain; Wikimedia Commons: Category:Fractional reserve bankingThe expansion of $100 through fractional-reserve banking with varying reserve requirements. Created with openoffice.org Calc. Data obtained by using information from the Federal Reserve Bank of New York which explains how the process of fractional-reserve banking creates new money. See the description of the process o...Wikimedia Commons; Analoguni; Own work; Public domain; Wikimedia Commons: Category:Fractional reserve bankingIllustration of the fractional reserve lending with a 20% reserve rateWikimedia Commons; Analoguni ( talk ) ( Uploads ); self-made. Created with OpenOffice.org Calc spreadsheet program.; Public domain; Wikimedia Commons: Category:Fractional reserve banking Reserves in this system are held either as physical cash within the bank's vaults or as balances maintained in an account at the central bank. This model contrasts with full-reserve banking, a theoretical alternative where banks would be required to keep all depositor funds on hand at all times. By holding only a fraction, banks facilitate credit creation and economic growth, though they must manage the risks associated with liquidity demands.