Fractional-reserve banking

Fractional-reserve banking is the banking practice in which banks keep only a fraction of their demand deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all demand deposits immediately upon demand.[1][2] Fractional reserve banking necessarily occurs when banks lend out funds received from demand deposits. This practice is universal in modern banking.

The practice of fractional reserve banking expands the money supply (cash + demand deposits) of a country beyond what it would otherwise be. In general, the money supply of a country will be a multiple larger than the amount of money created by the central bank. Central banks impose reserve requirements that require banks to keep a minimum fraction of their demand deposits as reserves. This both limits the amount of money creation that occurs in the commercial banking system, and ensures that banks have enough ready cash to meet normal demand for withdrawals. Problems can arise, however, when a large number of depositors seek withdrawal of their deposits, which can cause a bank run.