fractional reserve banking

Meaning

A banking system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal. The remaining funds are lent out to borrowers, which helps expand the economy's money supply.

Examples

• Under fractional reserve banking, banks can spark a panic if too many depositors try to withdraw cash at once.

  Under fractional reserve banking, banks can spark a panic if too many depositors try to withdraw cash at once.

• The modern financial system relies heavily on fractional reserve banking to generate credit.

  The modern financial system relies heavily on fractional reserve banking to generate credit.

• Central banks set the reserve requirements that govern fractional reserve banking operations.

  Central banks set the reserve requirements that govern fractional reserve banking operations.

• Critics argue that fractional reserve banking inherently increases the risk of bank runs.

  Critics argue that fractional reserve banking inherently increases the risk of bank runs.

• Without fractional reserve banking, the volume of loans available to businesses would shrink drastically.

  Without fractional reserve banking, the volume of loans available to businesses would shrink drastically.

Common Mistakes

• ✗ Our country uses fraction reserve banking.

  ✓ Our country uses fractional reserve banking.

  The adjective form 'fractional' must be used to describe the reserve banking system, not the noun 'fraction'.

• ✗ The bank operates with fractional reserve bank.

  ✓ The bank operates under a fractional reserve banking system.

  'Banking' refers to the system and practice, whereas 'bank' refers to the physical or corporate institution.

Related Expressions

Practice

• The concept of ________ allows commercial banks to create money through lending.

  💡 A banking system where only a portion of deposits are kept in reserve.

  Show answer

  fractional reserve banking

• During the Great Depression, the vulnerabilities of ________ became obvious as bank runs spread across the nation.

  💡 The system of lending out depositors' money.

  Show answer

  fractional reserve banking