fractional reserve

**Fractional Reserve**

Fractional reserve is a banking system practice where banks keep a fraction of their depositors’ funds in reserve and lend out the remaining balance. This method allows banks to create money through lending, supporting economic growth by increasing the availability of credit. The reserve ratio, set by regulatory authorities, determines the minimum amount of funds banks must hold to meet withdrawal demands. Understanding fractional reserve is essential for grasping how modern banking operates and its impact on money supply and financial stability.