Fractional-reserve banking

A banking system in which only a fraction of the total deposits managed by a bank must be kept in reserve. The amount of the deposits equals the amount of the reserves times the deposit multiplier.

For example when a bank has 100$ in deposit and then loans 500$, by using it's right to create money, it is doing 1/5 fractional reserve banking and hence the name.

In the U.S., this system is maintained by the Federal Reserve Board.

Since many are unaware of the existance of this banking practise, some people call it the the fractional reserve banking system scam.

The opposite of fractional reserve banking is full reserve banking.