Question

Why is the banking system in the United States referred to as a fractional reserve bank system? What is the role of deposit insurance in a fractional reserve system?

Answer the question in no less than 10 sentences.

Answer 1

Fractional Reserve Banking means that a bank only needs to keep a fraction of all the money deposited in its reserves. A scheme in which commercial banks and thrift institutions retain less than 100 per cent of their inspectable deposit liabilities as currency reserves held in bank vaults or as central bank deposits

The Deposit Insurance Fund's primary objectives are: (1) insuring the deposits and covering insured bank depositors, and (2) resolving failed banks. The DIF is financed primarily by quarterly assessments of insured banks but also collects interest income on its securities

Deposit insurance has been an important part of the financial system for half a century. It is responsible for the changing structure of depositary institutions and the essence of the management and control of depository institutions in a significant way. Thus, no government response to the growing structure of the financial services industry can be considered without addressing the position of insurance agencies