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What is fractional reserve banking? Draw a balance sheet of a bank that engages in fractional...

What is fractional reserve banking? Draw a balance sheet of a bank that engages in fractional

reserve banking.

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Answer #1

Fractional reserve banking is the practice of banks to keep some portion of their deposits in the form of cash to meet unforeseen demand. Banks accepts deposits, keep some fraction of their deposits in cash and lend the remaining amount. This reserve ratio is determined by the Federal Reserve.

Example: Suppose bank reserve ratio is 10%. Bank X receives $ 10000 deposits from its customer. Bank will keep 10% of 10000 = $ 1000 as reserve and lend remaining 10000 - 1000 = $ 9000.

Liabilities Amount Assets Amount
Reserves 1000 Deposits 10000
Loans 9000
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