Is fractional reserve banking dangerous?

Critics say that our current system allows private banks to create money and this causes financial instability. Are they right? Matthew Partridge reports.

What is all the fuss about?

The current banking system (called fractional reserve banking) is based on the idea that people are very unlikely to demand all their deposits back at once.

One example of this in practice is someone depositing £100 in a bank. Assuming that the bank has a reserve ratio of 25% (though in reality it would be much lower), it lends out £75 to an industrial firm. This £75 is deposited [...]

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