Banking and Credit

Banks act as financial intermediaries, accepting deposits from savers and lending out much of that money to borrowers, a system called fractional-reserve banking, since banks keep only a fraction of deposits on hand as reserves rather than the full amount; how much a bank actually lends beyond that minimum also depends on its own capital and liquidity needs and on demand for loans, not a fixed, automatic transfer of every remaining dollar. Credit lets a borrower access money now in exchange for a promise to repay it later, usually with interest as the cost of borrowing, and this system allows both individual spending and business investment to happen well beyond what savers' own literal cash holdings would otherwise allow.

This explanation is AI-generated and can occasionally be wrong. 🚩 Report