Money, banking and the macro-economy - A modern financial system - The role of banks in a fractional reserve system

3 important questions on Money, banking and the macro-economy - A modern financial system - The role of banks in a fractional reserve system

Explain the role of maturity transformation

Savers can access their money on short notice and borrowers can finance long-term projects.

What is a fractional reserve banking system?

Banks hold only a fraction of deposits in liquid form in their reserve accounts at the central bank.

Explain the role of risk pooling

Banks can withstand a certain proportion of defaulting, and hence offer little or no risk to savers.

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