Fractional Reserve Banking
Plain definition
The banking system in which banks keep only a fraction of their deposits as reserves and lend out the remainder to borrowers.
In economics
Fractional reserve banking lets banks create money: each loan becomes a deposit somewhere else, multiplying the initial reserves through the money multiplier (1/reserve ratio). The system relies on depositors not all withdrawing at once, which is why deposit insurance and central-bank lending exist to prevent bank runs.
Example
You deposit 100 as reserves and lends 900 in another bank, which keeps 810. The original $1,000 in reserves has now generated multiple rounds of new deposits.
Fractional reserve banking is confused with 100%-reserve (narrow) banking, where every deposit dollar is held as reserves and banks cannot lend deposits. Modern economies use fractional reserves, which is what makes the money multiplier and bank-run risk possible.