page_title: Fractional-reserve banking
section_title: Money supplies around the world
hierarchical_section_title: Fractional-reserve banking / Money supplies around the world
caption_attribution_description: English: The Euro money supply from September 1998 through October 2007.
context_page_description: Fractional-reserve banking, the most common form of banking practised by commercial banks worldwide, involves banks accepting deposits from customers and making loans to borrowers while holding in reserve an amount equal to only a fraction of the bank's deposit liabilities. Bank reserves are held as cash in the bank or as balances in the bank's account at a central bank. The country's central bank determines the minimum amount that banks must hold in liquid assets, called the "reserve requirement" or "reserve ratio". Banks usually hold more than this minimum amount, keeping excess reserves.
  Bank deposits are usually of a relatively short-term duration while loans made by banks tend to be longer-term – this requires banks to hold reserves to provide liquidity when depositors withdraw their money. Banks, working on the expectation that only a proportion of depositors will seek to withdraw funds at the same time, keep only a fraction of their liabilities as reserves. Thus they can experience an unexpected bank run when depositors wish to withdraw more funds than the reserves held by the bank.
context_section_description: In countries where fractional-reserve banking is prevalent, commercial bank money usually forms the majority of the money supply. The acceptance and value of commercial bank money is based on the fact that it can be exchanged freely at a commercial bank for central bank money.
  The actual increase in the money supply through this process may be lower, as (at each step) banks may choose to hold reserves in excess of the statutory minimum, borrowers may let some funds sit idle, and some members of the public may choose to hold cash, and there also may be delays or frictions in the lending process. Government regulations may also be used to limit the money creation process by preventing banks from giving out loans even though the reserve requirements have been fulfilled.
caption: Components of the euro money supply 1998–2007
exif: {}