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Basically the banks not having all their depositor’s money.

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But banks do have a balanced :-) Balance sheet .. sorry for adjective cuz the word literally means a balance ..

For example JPMC has four trillions in assets and around 3.75 in liabilities.. if they don't have all my dollars ..how do the balance it ?

They don’t hold 100% in liquid deposits, they loan out a portion to generate yield.

Obviously.. why would any one hold fiat .. they always hold interest bearing assets .. either private loans or TBills ..

Cykros 11mo ago

Bank reserves bear interest now too, through IOR at the Fed. they use it as part of their toolbox in regulating the Fed Funds rate, alongside open market operations.

You just asked what’s Fractional Reserve and now you’re putting on an economics lecture. What’s the question? 😂

But "not holding 100 percent in liquid cash"

.. is not what fractional reserve system means ..

That is my point ..

You’re saying what people think fractional reserve banking means isn’t really what it means?

Yes .. I think there was a video ..that started this myth that banks are lending 100 percent of what we deposit ( which is true) ..and then repeat ..thus creating money out of thin air .. and it was named Fractional Reserve banking ..

Totally unconnected ..

Sometimes incorrectly assigned terms just stick and become widely accepted.

We need easy short hand to fit a definition. 🤷‍♂️

It's accounting magic. When they lend out your deposit they debit cash and credit accounts receivable. It's all fine until those AR's default and become written off. Then they can just credit their bad debt account and write off a debit on their AR. There's no incentive to fix this since they can take a tax deduction on their bad debts.

Yes .. but how much bad loans are there .. besides they pay hefty insurance to cover 250 K and less depositors ..

Plus it is the question of business .. if they make bad loans , they will ultimately fail ..

Bailouts. They are "too big to fail" so they dgaf.

Too big to fail is bad for any sector ..but question was what is FRACTIONAL reserve :-)

For example Verizon is too big to fail .. so is ATT .. so is Google or Apple ..

"Too big to fail" is a reference to the 2007 US banking crisis when the housing bubble popped and too many people defaulted on their subprime mortgages. They couldn't repay their loans to the bank. This had a cascading effect because the banks didn't have enough cash reserves due to overleveraged debt and fractional reserve banking policies. When depositors panicked and tried to withdraw cash, there was no money. The entire shadow banking system was built on rehypothecating debt so everything collapsed and the US went into a major financial depression. The debt system is like a huge jenga tower and the fractional reserve system backing all the liquidity was the bottom block pulled out by the housing bubble pop. The banks went bankrupt but were deemed to be "too big to fail" and were subsequently bailed out by taxpayer money.

This has all happened before (very recently) and no lessons were learned by those at the top.

A fractional reserve means they only have to hold a fractional portion of deposits people make in their liquid reserves.

That fractional reserve policy is currently set at 0% meaning they have to hold at least 0% of deposits as liquid cash 🙄. Banks no longer have to actually have on hand any cash deposits. They can risk/lend out the entire balance in an attempt to earn a yield with your money.

Beg to disagree .. fractional reserve system means they need to hold a percentage with Fed .. for example JPMC has around .25 trillion deposited with Fed ..

This deposit determines interbank landing rate .. we can go in detail as to how it works but that is what target fund rate is ..

And that is where the name comes .. fractional reserve ..

Short term ( overnight ) interbanks lending rate ..

More detail please?

Okay ..so let's for example sake , every bank need to put up 1 percent of their deposits to Fed .. it is sometimes called high power money .. now if bank A 's daily deposit go down , they can reduce their reserve , and bank B s deposit increase then they need to increase their reserve .. means there is a transaction between the two banks .. Fed provides a target lending rate .. normally called Fed fund rate .. that is what Fed chair announces when he claims to cut the interest rates ..

As a side - This interbank lending rate has very little impact on long term T bills ..

Since only a small fraction of needs to be kept with reserve ( or central bank ) , this system is called Fractional Reserve system ..

As regards to how much a bank lend out as loans ( assets ) or keep in T bills ( assets ) is totally upto banks .. if they make good loans .. and balance the sheet with deposits they receive ( liabilities) they are good .. in effect they can't lend more than the total deposits ..

Means JPMC can lend only 4 trillion minus the reserve money . .. btw it is not a bad idea have little more assets than liabilities..hope this is clear .. so the idea that banks print money out of thin air is not entirely true ..

Now of course with such a manual system and dated technology..there are always systemic failures .. and too big to fail is a universal problem ..sadly (:-

Now ..of course deposits baloon out .. because let's say a bank makes a million dollar loan .. the normal practice is to send the money directly to seller through an escrow .. as in case of a home mortgage .. but the seller .. so that money doesn't come immediately back to borrower account ..

But seller will obviously deposit money for short term in his bank ( till he acquired a replacement asset ) .. this has kind of multiplier effect on money supply ..

That is why Fed needs to either inject liquidity or tighten the money supply to control inflation .. to their 2 percent target ..