Fractional Reserve Banking: Difference between revisions
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Holding only a fraction of on-demand liabilities means that in the event of a bank-run the bank is mathematically unable to meet its obligations. | Holding only a fraction of on-demand liabilities means that in the event of a bank-run the bank is mathematically unable to meet its obligations. | ||
Put simply: a fractional reserve bank (or exchange) faced with a bank run will not be able to give back 100% of their bitcoins to users and will go bankrupt. | |||
Revision as of 11:48, 29 December 2022
Fractional Reserve Banking is the practice whereby a bank holds reserves that are a fraction of its on-demand liabilities. It contrasts with a Full Reserve Banking system in which banks must hold reserves for 100% of on-demand liabilities.
Holding only a fraction of on-demand liabilities means that in the event of a bank-run the bank is mathematically unable to meet its obligations.
Put simply: a fractional reserve bank (or exchange) faced with a bank run will not be able to give back 100% of their bitcoins to users and will go bankrupt.