When banks utilize fractional reserve banking, what do they do?

In fractional reserve banking, banks are required to keep a fraction of their deposits in reserve while they can lend out the remaining portion. This practice allows banks to provide loans and create credit, which stimulates economic activity. By keeping only a fraction of deposits in reserve, banks can use the majority of those funds to earn interest through lending activities, while still being able to meet withdrawal demands from customers.

This system is fundamental to modern banking and contributes to the money supply within the economy, as the money lent out can eventually be deposited into other banks, allowing the process to continue. The requirement to maintain only a fraction as reserves means that banks can operate more efficiently, maximizing the use of their deposits to fuel economic growth. Consequently, this mechanism underpins the way banks operate within a fractional reserve banking system.