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Fractional Reserve Banking

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PPGPortal > Home > Concept Dictionary > F, G, H > Fractional Reserve Banking

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PPGPortal > Home > Concept Dictionary > F, G, H > Fractional Reserve Banking
 

Fractional Reserve Banking 

A banking system in which banks hold only a fraction of deposits as reserves.

(Peter Dungan, Toronto PPG1002H and Pal. Leslie. 2006. Beyond Policy Analysis: Public Issue Management in Turbulent Times, 3rd ed. Toronto: Nelson Education.)

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Fractional reserve banking increases the money supply because all of the depositors still “have” their deposits in the bank, but those getting loans also have money. The fact that each additional dollar added to a bank's reserves increases the money supply by more than one dollar is called the “money multiplier” effect.


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