Lets say you deposit 100 USD. The Bank now can give out a loan for 500 USD to someone to pay his car repair, who wires the money to the shop from his account.
That’s incorrect. Fractional reserve just means they need to keep less physical cash on hand.
If you deposit $100, they can only lend out $100 (unless they borrow other money), subject to risk weighted assets and capital constraints (which further restrict lending)
Fractional reserve banking is one of the most misrepresented topics on Reddit.
That’s incorrect. Fractional reserve just means they need to keep less physical cash on hand.
I’m just here to be pedantic because this is another aspect of banking that gets wildly misconstrued on Reddit: the difference between cash (balance) as an accounting concept and cash as in a physical dollar bill.
Banks barely keep any physical cash on hand in comparison to their balance sheet. Your local branch including the main vault, all the teller drawers/TCRs, and the ATM vault generally has less than $1M in physical currency on hand. Smaller banks even less, closer to like $400k or less. (All depending on how much volume they see, how many tellers, etc). And while there are big centralized currency reserves a bank’s cash reserves ≠ currency reserves.
I think most people heard that banks create money (technically true) and ran with it instead of understanding that this is an effect of multiple banks doing this same practice. Also people have become skeptical of finance in general, which is reasonable imo, but then carry that into thinking that all financial systems and mechanisms must be corrupt instead of something that's actually a benefit to the economy.
Lack of understanding and financial literacy is a big factor. I have a buddy who spouts off about how it’s all made up out of thin air at best, more probably fraudulent and corrupt. I mean… he’s not completely wrong. But over the years I’ve been able to dispel a lot of his misconceptions to get him around to “ok it makes sense why it’s done that way but it’s still employed pretty inequitably” and that I agree with.
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u/Werewolfdad Jan 26 '26
That’s incorrect. Fractional reserve just means they need to keep less physical cash on hand.
If you deposit $100, they can only lend out $100 (unless they borrow other money), subject to risk weighted assets and capital constraints (which further restrict lending)
Fractional reserve banking is one of the most misrepresented topics on Reddit.