Fractional-reserve banking
Banking system where only a fraction of deposits is held in reserve.
Fractional-reserve banking is a system where banks keep only a fraction of deposit liabilities as liquid reserves and lend the remainder, thereby expanding the money supply.[1] This system prevails in almost all countries worldwide.[2] Within the fractional-reserve banking system, the liquid assets a bank keeps to cover deposit liabilities include cash physically held at the bank and balances in its account at the central bank.[1]
Quick Facts
- Field
- Banking and monetary economics
- Key feature
- Banks hold reserves as cash or central bank balances, often less than total deposit liabilities
- Risk
- Bank runs can occur if depositors collectively withdraw more than reserves
Facts from the source article.
Key facts and history
Savers deposited gold and silver with goldsmiths, receiving notes that became an early form of circulating paper money.[3] Goldsmiths observed that people rarely redeemed all notes at once and began investing coin reserves in interest-bearing loans.[3] If creditors lost faith in a bank's ability to pay, many would redeem notes at once, causing a bank run.[3] Central banks were given power to set reserve requirements, centralize precious metal reserves, regulate commercial banks, and act as lender-of-last-resort.[4]
The emergence of central banks reduced the risk of bank runs and allowed fractional-reserve banking to continue.[2] The practice of keeping only a fraction of deposits as reserves emerged before any government monetary authorities existed, after bankers noticed that depositors rarely all ask for their money back at once.[3] Many early banks were destroyed by such runs on their deposits.[3] The establishment of central banks, starting with the Swedish Riksbank in 1668, was a response to these early financial crises.[4]
What the cited sources add
A Yale School of Management article notes that U.S. banking regulators during the Covid-19 crisis did not require banks deferring payments to automatically categorize loan modifications as troubled debt restructurings.[5] Another Yale Insights article observes that the fundamental maturity mismatch of bank assets and liabilities means banking panics have occurred at regular intervals for hundreds of years.[6]
References
- Wikipedia, "Fractional-reserve banking" (CC BY-SA 4.0), which cites: Rafiq, "The Fractional Reserve Banking Dilemma: Insights and Implications", 2023-12-01 (original not read by us) en.wikipedia.org
- Wikipedia, "Fractional-reserve banking" (CC BY-SA 4.0), which cites: Mankiw, "Macroeconomics", Worth, 2002, p. 482–489; Mishkin, "The Economics of Money, Banking, and Financial Markets", 2022; Christophers, "Banking Across Boundaries: Placing Finance in Capitalism", John Wiley and Sons, 2013 (original not read by us) en.wikipedia.org
- Wikipedia, "Fractional-reserve banking" (CC BY-SA 4.0), which cites: United States. Congress. House. Banking and Currency Committee., "Money facts; 169 questions and answers on money – a supplement to A Primer on Money, with index, Subcommittee on Domestic Finance ... 1964.", 1964 (original not read by us) en.wikipedia.org
- Wikipedia, "Fractional-reserve banking" (CC BY-SA 4.0), which cites: Kindleberger, "A Financial History of Western Europe", Routledge, 2007 (we also read that source) en.wikipedia.org
- "What macroprudential policies are countries using to help their economies through the Covid-19 crisis? Yale School of Management", som.yale.edu. facts only, no text reused. som.yale.edu
- "Is the Collapse of SVB the Start of a Banking Panic? Yale Insights", insights.som.yale.edu, 2023-03-11. facts only, no text reused. insights.som.yale.edu
Each numbered sentence above was checked against the source it cites before publication. Sentences citing Wikipedia adapt text from the English Wikipedia article Fractional-reserve banking (contributors), used under CC BY-SA 4.0; this entry is available under the same licence. Other sources were used for facts only; no text or images are copied from them.
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