Finance glossary
Fractional Reserve Banking
Definition
Banks keeping only a fraction of deposits and lending the rest.
Under fractional reserve banking, banks hold only a portion of deposits in reserve and lend out the rest, effectively creating money as loans circulate. It expands credit and growth but makes banks vulnerable to runs if too many depositors withdraw at once.
In a sentence
Under fractional reserve banking, the bank kept a sliver of deposits and lent the rest back out.
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