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Fractional reserve banking is a system that requires banks to keep a percentage of deposits in their customers' transactional accounts (such as checking and savings accounts) on reserve.
Under the previous U.S. reserve requirement, banks had to keep as much as 10% of deposits in their vaults or with the Federal Reserve. However, this threshold was reduced to 0% in 2020, effectively eliminating the cash reserve requirement for depository institutions.
As a bank customer, you probably didn't notice when the fractional reserve requirement went away in the U.S. While banks reasoned that the requirement had forced them to raise interest rates on lending and lower interest rates on bank deposits, there was no notable benefit to banking customers after the system ended. Then again, banks had already been ******* ding cash in excess of the reserve requirement for over a decade following the 2008 financial crisis.
Still, fractional reserve banking is an important concept to understand as it relates to our modern banking system. Here’s more about what fractional reserve banking is and how it works.