Definition ∞ Fractional reserve banking is a system where banks hold only a fraction of their customers’ deposits as reserves and lend out the remainder. This practice allows banks to create money through lending, thereby expanding the money supply. It is a fundamental component of modern banking systems.
Context ∞ The principles of fractional reserve banking are sometimes debated in the context of stablecoins and decentralized finance protocols that involve collateralized lending. While traditional banks operate under specific reserve requirements, similar mechanisms are being considered for digital asset issuers to ensure solvency and stability. This comparison highlights the evolving financial landscape and its regulatory implications.
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