A measure of how much commercial bank money can be produced from one unit of central bank money under the fractional reserve banking system. By loaning out money from depositor’s funds, banks can increase the amount of cash in circulation in the economy. Under the fractional reserve system, banks are required to keep between 10% and 15% of depositors funds; the rest can be loaned out. So if a commercial bank borrows £100,000 from a central bank, it keeps say 10% to meet its reserve requirements and loans out the other £90,000. The bank receiving the deposit sets aside its own 10% or £9,000 and can loan out the remaining £81,000. Through this process the initial £100,000 expands into more than £500,000.
This definition is for general information purposes only
