This term is used to describe how banks give out more money than they actually have as real physical assets to back up any claim on that money. In more prudent times the fractional reserve percentage was around 10%. This means that banks only had 10% of the money they gave out in loans as assets on their books. However during the past decade this was shamelessly violated and often could be as low as 1%. The fractional reserve system of lending is fundamentally unstable. Depositers believe that their money is available on demand while in reality only a tiny percentage is kept on reserve. Any negative news could spark panic and lead to a ‘run on the banks’.

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