Banking systems are an institution people often trust without knowing much about how they work. What happens to an account holder’s money after they deposit it? Fractional reserve banking can help answer that. Fractional reserve banking is a system that can help stimulate the economy, but can also create financial chaos in a worst-case scenario. What Is Fractional Reserve Banking? Fractional reserve banking is a system where only a fraction of the cash banks have is liquid. In other words, banks only keep a fraction of the cash customers deposit in reserves and lend the rest out. They may also use remaining funds to invest to grow their available cash reserves. The interest banks charge on loans to customers is typically used to pay for expenses and generate more cash. The goal of fractional reserve banking is to stimulate the economy by helping more cash circulate while also meeting customer withdrawal needs. The Federal Reserve doesn’t always make it mandatory for banks to have a minimum reserve, but there was a time when it was necessary to have a percentage in reserves. Benefits of Fractional