Fractional reserve banking.

In plain English

Under fractional reserve banking, a deposit does not sit in a drawer waiting for you, it funds loans, and the bank keeps enough reserves and liquid assets to meet expected withdrawals. The arrangement is what lets savings become mortgages and business loans instead of idle cash. It also creates a built-in mismatch, because deposits can be withdrawn on demand while loans repay over years. Deposit insurance, liquidity rules, capital requirements, and a central bank backstop exist to manage that mismatch. The old textbook money multiplier, total deposits divided by the reserve ratio, is a simplified picture rather than a description of how modern lending is constrained.

01Why it matters

This is why your checking balance can be available instantly and simultaneously financing someone's home loan, and why the safeguards around banks matter more than the balance printed on your statement.

02The math, step by step

Say a bank takes a $1,000 deposit and keeps 10 percent, or $100, as reserves. It lends $900, which becomes a deposit elsewhere, and that bank keeps $90 and lends $810. In the simplified model, $1,000 divided by 0.10 supports up to $10,000 of deposits across the system.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

Every figure on this page is sourced to a primary document. Tap to open the original.