What is the term for the practice of banks keeping only a fraction of deposits in reserve and lending out the rest?
Fractional reserve banking
The answer was Fractional reserve banking. Here's the why, the decoys, and the source trail.
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Fractional reserve banking is the system where banks hold only a small percentage of depositors' money in reserve and lend out the remainder. This practice is what allows banks to create credit and is fundamental to how modern banking systems expand the money supply.
This answer is checked against Federal Reserve - Reserve Requirements and Wikipedia - Fractional-reserve banking.
A good trivia question makes the wrong answers feel close. Here is the clean read on the set.
- Fractional reserve banking - correct answer.
- Quantitative easing - a decoy; it may live near the same topic, but it does not answer this exact clue.
- Capital arbitrage - a decoy; it may live near the same topic, but it does not answer this exact clue.
- Deposit leveraging - a decoy; it may live near the same topic, but it does not answer this exact clue.
Fractional reserve banking is the one to remember. Fractional reserve banking is the system where banks hold only a small percentage of depositors' money in reserve and lend out the remainder. Before 2020, the Federal Reserve required most banks to hold at least 10% of deposits in reserve, but it dropped the requirement to 0% during the pandemic — where it remains today.
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Sources: Federal Reserve - Reserve Requirements, Wikipedia - Fractional-reserve banking