Tag Archives: Fractional reserve banking

How banks destabilise the economy – and take your money

[Extract from The Nature of the Beast]

Almost every institution involved in the financial system is, in the jargon, highly leveraged.  This is as true of old-fashioned banks with fractional reserves and mainstream banks with capital adequacy requirements as it is of shadow banks. What does “highly leveraged” mean?  It means you are betting a small amount of your own money plus a lot of other peoples’ money on a large return.  If the return is positive, you make a handsome profit.  However if the return is negative you lose not only your stake but potentially everything you own.

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