Fractional-reserve banking
Fractional-reserve banking is like playing a game with your savings. Banks are allowed to use your money to make more money. Here's how it works:
When you put money into a bank, the bank keeps a certain amount of your money and lends out the rest. The amount of money the bank keeps is called the 'reserve', and the amount the bank lends out is called the 'fraction'.
For example, if you put $100 into a bank, the bank may keep $10 as a reserve and lend out $90. So now the bank has $100 from you and $90 from someone else that was lent out.
The bank can use the $90 it lent out to lend to even more people, or to invest in things like stocks and bonds. When the people that borrowed money from the bank pay it back, the bank makes money from it.
Sometimes banks make too many loans and can't pay everyone back if too many people want their money at once. To try to prevent this from happening, governments have rules about how much a bank can lend out.
Fractional-reserve banking is a way for banks to make money and help the economy, but it can also be risky.
When you put money into a bank, the bank keeps a certain amount of your money and lends out the rest. The amount of money the bank keeps is called the 'reserve', and the amount the bank lends out is called the 'fraction'.
For example, if you put $100 into a bank, the bank may keep $10 as a reserve and lend out $90. So now the bank has $100 from you and $90 from someone else that was lent out.
The bank can use the $90 it lent out to lend to even more people, or to invest in things like stocks and bonds. When the people that borrowed money from the bank pay it back, the bank makes money from it.
Sometimes banks make too many loans and can't pay everyone back if too many people want their money at once. To try to prevent this from happening, governments have rules about how much a bank can lend out.
Fractional-reserve banking is a way for banks to make money and help the economy, but it can also be risky.
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