Answer to Question #107999 in Macroeconomics for Kj Hawkins

Question

what is the inherent risk of fractional reserve banking

Answer 1

Inherent risks of fractional reserve banking refers to errors occurring in financial statements when banks continue accepting deposits from depositors and giving out loans to borrowers, and holding reserves equal to a fraction of the bank's deposit liabilities. Since financial systems always need higher levels of indebtedness, monetary reformers always sense that these errors can cause financial crises in most banks in the developed world as a results of increased tax loopholes and a reduction in effective re-distributive taxes.