Fractional Reserve Banking is the banking practice in which banks keep only a fraction of their deposits in reserve and lend out the remainder, while at the same time maintaining the obligation to redeem all these deposits upon demand. Fractional reserve banking occurs when banks lend out any fraction of the funds received from deposit accounts. This practice is universal in modern banking, and is to be contrasted with full-reserve banking which died out over two centuries ago. By its nature, the practice of fractional reserve banking expands money supply (cash and demand deposits) beyond what it would otherwise be. The standard amount of reserve is generally 10%; meaning if you deposit $10, then $9 of those are used to lend out and $1 is kept on deposit in the bank. In actuality the reserve ends up being much lower than that. The problem with this system is that it creates huge amounts of credit and additional money supply. Yes banks can actually create more money; all banks can do this. This system is a major contributor to creating bubbles and inflation. For an illustration see Fractional Reserve Lending Video m.youtube/watch?v=qIxhsF6JLEA&feature=related&desktop_uri=%2Fwatch%3Fv%3DqIxhsF6JLEA%26feature%3Drelated
Posted on: Tue, 03 Sep 2013 01:26:59 +0000
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