Fractional Reserve Banking System
Fractional reserve banking is a banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal. This is done to expand the economy by freeing up capital that can be loaned out to other parties. Banks are required to keep a certain percentage of their deposits as reserves, and the rest is used to create new loans and investments. This system is used by most banks in the world and is regulated by the central bank of each country.
History of Fractional Reserve Banking
The concept of fractional reserve banking dates back to the 17th century, when the Bank of England was established. The Bank of England was the first bank to use this system, and it quickly spread to other countries. The system was designed to increase the money supply and stimulate economic growth. It also allowed banks to make more loans and investments, which increased their profits.
In the 19th century, fractional reserve banking became more widespread and was adopted by many countries. This system allowed banks to increase their lending capacity and create more money. However, it also created the potential for financial instability, as banks could become overextended and unable to meet their obligations.
Table of Comparisons
| Country | Reserve Requirement |
|---|---|
| United States | 10% |
| United Kingdom | 3% |
| Japan | 2% |
| China | 17.5% |
Summary
Fractional reserve banking is a banking system in which only a fraction of bank deposits are backed by actual cash-on-hand and are available for withdrawal. This system is used by most banks in the world and is regulated by the central bank of each country. It was designed to increase the money supply and stimulate economic growth, but it also created the potential for financial instability. For more information on fractional reserve banking, you can visit the websites of the Federal Reserve, the Bank of England, and other central banks.
See Also
- Central Bank
- Money Supply
- Reserve Requirement
- Interest Rate
- Monetary Policy
- Inflation
- Deflation
- Liquidity
- Credit Risk
- Financial Stability
