Banking & Credit · BNK-014
Fractional Reserve Banking
A source-linked chapter designed to teach the subject itself, not a generic lesson template.
Chapter map
Follow the actual ideas in this lesson.
The sequence below comes from this topic's published material. Sections expand or contract with the subject instead of forcing every lesson into the same five-step mold.
Learning objectives
Learning objectives
By the end of this lesson, you should be able to describe the historical fractional-reserve idea, explain why deposits are bank liabilities and loans are bank assets, demonstrate how a loan can expand a bank balance sheet, explain the classic reserve-ratio money-multiplier model as a historical teaching model, identify why that model is not an accurate description of current U.S. monetary-policy implementation, and replace it with a modern explanation based on balance sheets, liquidity, capital, funding, and interest-rate incentives.
Chapter review
Assessment still in review.
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References & evidence
Source library for this chapter
These are the linked sources supporting the verified claims used throughout the lesson.
- 01Reserve RequirementsOpen source ↗
Board of Governors of the Federal Reserve System
- 02Teaching the Linkage Between Banks and the Fed: R.I.P. Money MultiplierOpen source ↗
Federal Reserve Bank of St. Louis
View claim-by-claim traceability6 verified claims
The Federal Reserve reduced reserve requirement ratios to zero percent effective March 26, 2020.
supported · checked Sep 21, 2026The traditional simple money-multiplier model that links a positive required-reserve ratio mechanically to deposit creation is obsolete as a description of current Federal Reserve monetary-policy implementation.
supported · checked Sep 21, 2026The traditional fractional-reserve model describes banks as holding only a fraction of deposit liabilities in reserve while holding other assets such as loans and securities.
supported · checked Sep 21, 2026A useful modern explanation of bank–Federal Reserve linkage emphasizes interest rates and balance-sheet incentives rather than a fixed reserve-ratio multiplier.
supported · checked Sep 21, 2026Modern banks expand balance sheets when they make loans, creating a loan asset and typically a corresponding deposit liability, subject to capital, liquidity, funding, risk, pricing, and borrower-demand constraints.
supported · checked Sep 21, 2026Banks do not lend out a fixed pool of preexisting reserves one dollar at a time in the simple textbook sequence; reserves are used for settlement and liquidity within a broader banking system.
supported · checked Sep 21, 2026