Fractional Reserve Banking

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What is Fractional Reserve Banking?

Fractional reserve banking is the most common form of banking practised by comercial banks worldwide. It is explained in detail in the book "Modern Money Mechanics” and also found at the following link: Fractional Reserve Banking Explained - Modern Money Mechanics

It involves banks accepting deposits from customers and making loans to borrowers, while holding in reserve a fraction on the bank’s deposit liabilities in that bank’s account at the Central Bank. Bank reserves are held as cash in the bank or as balances in the bank’s account at the Central Bank.

The minimum amount that banks are required to hold in liquid assets is determined by the country’s Central Bank and is called the reserve requirement. The reserve held is typically 10% so for every deposit made in the bank, 90% of those funds are available to the bank for use. So, for every deposit, the bank can use 9 times that money for transactions.