Fractional reserve system (FRS)

Fractional reserve system (FRS),

Definition of Fractional reserve system (FRS):

  1. Monetary policy at the basis of the modern banking system. Under FRS, banks are required to hold only a fraction (typically 12 percent) of the depositors funds as cash reserves. The remaining 88 percent of deposited funds can be loaned out to create new deposits which in turn create new loans ... and so on, exerting a multiplier effect on the total money supply. However, in case of a bank run, this policy can cause banks to suffer huge losses and may even push them into bankruptcy.

Meaning of Fractional reserve system (FRS) & Fractional reserve system (FRS) Definition