What is the difference between fractional-reserve and full-reserve banking?

Fractional-reserve banking is a common bank practice where banks are creating credit while keeping reserves equal to a required fraction of the bank’s deposit liabilities. This essentially means that funds in a fractional-reserve banking system belong to the bank in which they have been deposited, and the individual themselves have access to an IOU.

An alternative to fractional-reserve banking is a system where banks are obligated to keep the full value of each depositors’ funds, ready for immediate withdrawal on demand.

This kind of system would not allow a banking institution to lend money, and instead, only issue IOUs which reflect one-to-one holdings. This system would therefore not be subject to the same credit-risks that commercial banks create.

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