Fractional-reserve banking: Difference between revisions
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Fractional-reserve banking is the modern practice of lending multiples of deposits held by banks. For example, a deposit of ten pounds enables the bank to lend ninety pounds to a new borrower (i.e. £100, less £10 kept as reserve), thereby increasing the amount "money" in circulation. The reserve ratio | '''Fractional-reserve banking''' is the modern practice of lending multiples of deposits held by banks. Current banking laws (in most countries) require that only a fraction of all deposits be kept as a reserve, and the bank is free to lend out the remainder. For example, if the reserve fraction is 10%, a deposit of ten pounds enables the bank to lend ninety pounds to a new borrower (i.e. £100, less £10 kept as reserve), thereby increasing the amount "money" in circulation. The reserve ratio can be changed from time to time as determined by a country's banking regularory structure, and is theoretically one means of controlling the money supply, though it is not often used as such. | ||
Critics of fractional-reserve banking argue that banks have an unfair advantage over other businesses in being able to "transform a dollar of reserves into many dollars of money". | Critics of fractional-reserve banking argue that banks have an unfair advantage over other businesses in being able to "transform a dollar of reserves into many dollars of money". | ||
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Revision as of 16:13, 8 May 2007
Fractional-reserve banking is the modern practice of lending multiples of deposits held by banks. Current banking laws (in most countries) require that only a fraction of all deposits be kept as a reserve, and the bank is free to lend out the remainder. For example, if the reserve fraction is 10%, a deposit of ten pounds enables the bank to lend ninety pounds to a new borrower (i.e. £100, less £10 kept as reserve), thereby increasing the amount "money" in circulation. The reserve ratio can be changed from time to time as determined by a country's banking regularory structure, and is theoretically one means of controlling the money supply, though it is not often used as such.
Critics of fractional-reserve banking argue that banks have an unfair advantage over other businesses in being able to "transform a dollar of reserves into many dollars of money".