Banks do NOT need to keep all of their deposits on hand as reserves because

Question

Quizplus · Accepted Answer

Banks only need to keep a fraction of deposits on hand as reserves because only a small percentage of depositors will withdraw their funds at any given time, allowing the bank to lend out the remaining funds and earn interest. This is known as fractional reserve banking. The FDIC protects depositors in case the bank fails, but it does not affect the need for banks to hold reserves. Bank robberies are a risk for banks, but they do not affect the need for reserves. While banks can generate new reserves through the money creation process, this is not the reason why they do not need to keep all their deposits on hand as reserves.

Banks Do NOT Need to Keep All of Their Deposits