# Fractional Reserve Banking

*Banking & Payments — Finicade finance glossary*

Fractional reserve banking is the practice of holding only a fraction of deposits as reserves and lending out the rest, which is how bank lending creates money. The textbook money multiplier is a simplification: in modern systems, banks lend first and find reserves after, constrained by capital and demand rather than by a reserve ratio. Several central banks have set that ratio to zero without any consequence for money creation.

**Also known as:** fractional reserve, money multiplier

**Related terms:** [Reserve Requirement](https://finicade.com/glossary/reserve-requirement), [Money Supply](https://finicade.com/glossary/money-supply), [Bank Run](https://finicade.com/glossary/bank-run), [Commercial Bank](https://finicade.com/glossary/commercial-bank), [Central Bank](https://finicade.com/glossary/central-bank)

Source: https://finicade.com/glossary/fractional-reserve-banking