Question

Fractional reserve banking as a banking system in which banks normally retain less money(Liquid assets) than their depositors have right to claim. we noted that fractional reserve banking is nothing new, it has exited since ancient times. the fractional reserve system enhances the potential profitability of banks, but we noted that it is associated with one major problem, a problem so serious as the sometimes threaten the continued existence of the bank. WHAT IS THIS ONE MOST SERIOUS PROBLEM?

Answer 1

Fractional-reserve banking refers to a situation in which two individuals are made owners of the same thing, as under Fractional-reserve banking, a bank lends out money that clients have deposited with it.

Under this, through bank lending, the borrower and the depositor become owners of the same money which leads to contractual obligations that cannot be fulfilled and is objectively false and thus fraudulent.

This is a serious problem when a large number of depositors suddenly ask for their money back and banks are unable to get their hands on enough cash to meet demand. This problem arises due to liquidity crisis where assets can’t be converted into cash quickly and due to a solvency problem where assets aren’t worth enough, or a combination of the two.