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FRACTIONAL RESERVE SYSTEM (FRS) Definition & Legal Meaning

Definition & Citations:

Modern banking system’s monetary policy. Banks hold typically 12 percent cash reserves, only a fraction, against depositors’ funds. Banks create deposits by loaning out the remaining 88 percent of deposited funds. This loaning exerts a multiplier effect on the total money supply. Banks loan out the new 88% for new deposits, and so on , and so on …. This policy potentially risks banks to suffer huge losses if there is a bank run. Bankruptcy would likely occur.


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