Banks lend out most of their deposits
Fractional-reserve banking
Banks lend out most of their deposits
The reserve requirement set by the central bank determines the minimum amount banks must hold in reserves. Banks can hold excess reserves beyond this minimum, but they must still maintain a fraction of deposits as reserves. This ensures liquidity and stability in the banking system.
Example
If a bank receives a deposit of $1,000 and the reserve requirement is 10%, the bank must hold $100 as reserves. The remaining $900 can be lent out to borrowers.
Understanding fractional-reserve banking is crucial for grasping how banks create money and manage liquidity.
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Reserve requirements mandate minimum cash holdings for banks
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Educational content, not financial advice.
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