Fractional-reserve banking

A banking system in which banks hold some deposits as reserves and use the rest to make loans or investments. Banks create deposit money when they lend, while remaining obligated to meet withdrawals and payments.

Bank reserves: Cash and central-bank balances that banks hold to meet payments and withdrawals. These are the funds fractional-reserve banks retain rather than lend.
Commercial bank: A financial institution that accepts deposits, makes loans, and provides payment services. Fractional-reserve banking describes a common way commercial banks manage deposits.
Full-reserve banking: A proposed system requiring banks to hold reserves equal to specified transaction deposits. It replaces the partial-reserve structure with much stricter backing of deposits.
Lender of last resort: An institution, usually a central bank, that lends to financial institutions facing temporary funding shortages. Emergency lending can help solvent banks meet withdrawals without fire-selling assets.
Bank lending: The provision of funds by banks to borrowers under agreed repayment terms. Lending is the main use of deposits not held as reserves.
Demand deposit: A bank deposit that can be withdrawn or transferred on demand. Such deposits are liabilities banks must honor even when funds have been lent.
Narrow banking: A banking proposal that backs payment deposits with safe, highly liquid assets. It separates payment services from much of the lending funded by ordinary deposits.
Monetary policy: Actions by a central bank to influence interest rates, credit conditions, and the money supply. Policy changes affect bank funding costs and the demand for loans.
Deposit creation: The creation of bank deposits when commercial banks make loans or purchase assets. A new loan typically creates a matching deposit, expanding spendable money.
Liquidity: The ability to meet payment obligations promptly without substantial loss. Banks must balance liquid reserves against less-liquid loans and investments.

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