Fractional Reserve Banking

Fractional reserve banking is a system where banks keep only a fraction of their deposits as reserves and lend out the rest. For example, if you deposit $100, the bank may keep $10 as a reserve and loan out $90. This practice allows banks to create new money through loans, stimulating economic activity. However, it also means that banks are vulnerable to runs if too many people withdraw their money simultaneously, as they don’t have enough cash on hand. Overall, this system helps balance liquidity and lending, supporting growth while requiring careful regulation to ensure stability.