Full reserve Banking vs. Fractional Reserve Banking

Aspect

Full-Reserve Banking

Fractional-Reserve Banking

Basic idea

Safeguarding the Deposits

Expanding Credit and Risk

Demand Deposit Handling

Banks must hold 100% of demand deposits in vaults; act as custodians

Banks can lend out a portion of demand deposits.

Fees for Deposit Service

Banks charge fees for safeguarding deposits.

No fees are usually charged for deposit safeguarding.

Lending Source

Banks can only lend money received as time deposits.

Banks can lend more money than they hold in cash.

Risk of Bank Run

Low risk of bank runs due to full reserves.

Higher risk of bank runs if many demand cash at once.

Handling Crises

Usually, no need for central bank intervention in crises.

Central banks can provide emergency cash if needed.

Economic Perspective

Supporters argue it prevents crises and stabilizes the economy.

Supporters argue it spurs investment and growth.

India follows the Fractional Reserve Banking System. 

Bank Run: 

• When several depositors take their money out of a bank at once, it’s known as a “bank run.” This happens when there are worries about the bank’s stability or solvency.