Fractional Reserve Banking: What It Really Means for Your Money

In Singapore (and almost every developed country), your bank doesn’t stash all your deposited cash in a vault. Instead, it’s out there working — helping to power loans, businesses, and economic growth. This system is known as fractional reserve banking. While it may sound like something out of a finance textbook, it’s actually a fundamental part of how money flows through our everyday lives.

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Fractional reserve banking is a system where banks only keep a portion — or fraction — of customer deposits on hand as cash. The rest? It’s lent out or invested.

Here’s how it works. If you deposit S$1,000 into your POSB or UOB savings account, your bank doesn’t store every cent in its vault. Instead, it keeps a small chunk — say 10% — and uses the other 90% to issue loans to businesses, individuals, or invest in secure financial instruments.

This system helps fuel economic activity. Your idle savings become home loans, SME funding, or investments in government bonds. It’s how banks play a central role in keeping economies growing and money circulating.

Yes, it absolutely is — and it’s tightly regulated.

In Singapore, all licensed banks operate under this model, supervised by the Monetary Authority of Singapore (MAS). It’s a common practice in developed countries such as the United States and the United Kingdom as well.

The key difference in Singapore is the high level of oversight. MAS enforces strict regulations to ensure banks maintain enough liquidity, operate responsibly, and keep customer trust intact. So while banks here use fractional reserves, they do so within a carefully monitored framework.

Reserve requirements refer to the minimum amount of money banks are required to keep in reserve — either in their own vaults or with MAS. In Singapore, this is known as the Statutory Reserve Requirement (SRR).

But MAS doesn’t stop there. It also requires banks to meet the liquidity coverage ratio (LCR), which ensures they hold enough high-quality liquid assets (like cash or government bonds) to survive a 30-day stress scenario — such as a sudden spike in withdrawals.

We saw the importance of this during the Covid-19 pandemic, when markets were volatile and consumer confidence dipped. Thanks to regulations like the LCR, Singapore banks remained stable and well-capitalised, giving customers peace of mind. Even during periods of international uncertainty — like recent economic tensions during Donald Trump’s presidency — Singapore’s banking system held strong.

The takeaway: our banks are built to handle panic withdrawals and short-term shocks without breaking a sweat.

Fractional reserve banking also helps increase the total money in the economy — through a process known as the money multiplier.

Here’s a simple way to picture it. Let’s say you deposit S$1,000, and your bank keeps 10% (S$100) in reserve. It can now lend out S$900 to someone else, who then deposits it in their own account. Their bank keeps S$90 and lends out S$810 — and the cycle continues.

That original S$1,000 could eventually support up to S$10,000 in total deposits across the system.

Think of it like a kopi-sharing chain: one person buys a kopi and takes a few sips, then passes it on. Everyone gets a taste, even if no one finishes the whole cup. That’s how money “multiplies” without needing to print more.

Yes — very safe.

Enter the Singapore Deposit Insurance Corporation (SDIC), which protects up to S$75,000 per depositor per bank in the event of a bank failure. So even if a bank runs into trouble, your deposits are insured up to this amount.

On top of that, MAS imposes strict rules on lending practices, liquidity, and risk management. These safeguards ensure banks are not overexposed or reckless with your money.

So while your bank might lend out part of your deposit, you can rest easy knowing your funds are backed by regulations, strong capital buffers, and insurance.