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Simple Fractional Reserve Banking Model

This is a simple model demonstrating how the banking system can accept a cash or electronic deposit, and, through the practice of fractional reserve banking, create new money (typically electronically) in exponential proportion to the fractional reserve ratio.

Model Parameters:

Try experimenting with any of the model's values. The ones in bold are the most interesting.

Notice how quickly profits increase with a low reserve ratio, or with large spreads between deposit and loan rates - even with low rates such as 1% and 2% respectively:

Reserve Ratio (%):
Deposit Interest Rate (%):
Loan Interest Rate (%):
Initial Deposit:

The Reserve Ratio is the minimum reserve of each deposit that a bank must legally hold in, for example, a vault or reserve account. This reserve cannot be invested commercially.

The Deposit Interest Rate is the rate a bank pays customers on their deposits in, for example, a savings account.

The Loan Interest Rate is the rate a bank charges customers who borrow money through, for example, a mortgage or personal loan.

Obviously, for the banks to make a profit, the Deposit Interest Rate must be lower than the Loan Interest Rate. In fact, for a bank to break even, the relative percentage by which the Deposit Interest Rate must be lower than the Loan Interest Rate turns out to be equal to the Reserve Ratio percentage (try it!). This is because the reserve amounts are, as their name suggests, reserved; they are safely put away and are not available for commercial investment purposes.

Results Summary:

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Detailed Account View:

Interest paid out to customers for their deposits is shown in red.

Interest earned from loans to customers is shown in green.

Reserves corresponding to each deposit, and which cannot be loaned out, are shown in gold.
Account Number Deposit Interest Out Loan Interest In Reserves

Further Reading

Wikipedia article on Fractional Reserve Banking.