How does fractional reserve banking work?

Question

How does fractional reserve banking work?

In: 2

Answer 1

10 people each deposit $100 in the bank. So the bank has $1,000 worth of deposits.

The bank lends some of this $1,000 out to people. But they always keep $200 in their vault as reserves, so that if any of their depositors come and want to withdraw their money, they can have it. It’s fine that they don’t have all $1,000 in the vault all the time, because it’s unlikely that all 10 people will want to withdraw all of their money at once.

So the banks keep a *fraction* in *reserve*. Fractional-reserve banking.