Fractional Reserve Banking, Is Your Money Safe?
Modern banks today rely on the fractional reserve system where they serve as financial intermediaries between borrowers and savers. It also allows banks to provide longer-term loans to borrowers while providing immediate liquidity to depositors. But under fractional reserve banking, is your money safe?
What is Fractional Reserve Banking
Fractional reserve banking is a banking system in which banks only hold a fraction of the money deposited as reserves. This means only a fraction of the bank deposits are backed by actual cash on hand and are available for withdrawal. With this system, the portion of money not considered as reserves can then loaned out by banks to other parties.
The reserve ratio is often determined and regulated by the government and/or bank policies. So for example, if you deposit $100 to your bank and it is required to keep 10 percent of your deposit as a reserve, then the bank can use $90 to make loans.
What’s interesting is that under this premise, banks can create new money out of base deposits through debt. Taking the example above, when the bank loans out the remaining $90 from your initial deposit then it adds $90 to the money supply.
When the borrower deposits the $90 to the bank, the same process will apply. The bank can keep $9 and the remaining $81 can be loaned out once again and is added into the money supply. This can happen several times and is called the multiplier effect.
The Problem with Fractional Reserve Banking
Perhaps the main drawback of fractional reserve banking is the multiplier effect. While it increases the money supply, it does not necessarily increase the wealth of the economy. This is because while borrowers get more money, they are also taking in more debt meaning they are not richer than they were before. Apart from this, the multiplier effect also causes a massive increase in inflation. When the money supply in an economy goes up, prices rise as well which affects financial stability.
What’s more, the fractional reserve system puts banks at a constant risk of bank runs since they only keep 10 percent of the money people have deposited. Once depositors wish to withdraw funds that are greater than the reserves held at the bank, these financial institutions can collapse.
Safe Deposit Boxes Can Guard Your Wealth
Now the question for most people is that under the system of fractional reserve banking, is your money safe in commercial banks? The quick answer is it’s not always safe. The current system is open to risks of varying degrees. There are mild risks like loans not getting paid back or banks going under but there are also severe risks like currency collapse, banking crises, or even civil war.
To prevent the modern banking system from jeopardizing your wealth, it’s important to diversify your assets. Apart from investing in stocks and bonds, you may also invest in commodities like gold, silver, and precious gems. If you’re worried about keeping these physical assets safe from theft, natural disasters, and damage, then the best option for you are security safe boxes.
Service providers like Private Vaults Australia are an independent safe deposit box facility that offers complete discretion, unparalleled security, and absolute peace of mind to its clients. Conveniently located Unit 3, 73 Redcliffe Parade and Baker Street, Redcliffe Old 4020, it offers a wide range of services for people who are in need of vault storage options in Australia.
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