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Comment by soVeryTired | Hacker News Reader

Fractional reserve banking doesn't really exist any more in the developed world. Banks lend against their capital, not their reserves [1].

[1] http://www.bankofengland.co.uk/publications/Documents/quarte...

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"In normal times, the Bank of England implements monetary policy by setting the interest rate on central bank reserves."

thx @soVeryTired, plz excuse lack of financial knowledge. What is the definition of "reserves"?

A bank's reserves are the funds it holds in its account in the central bank. Some countries require that a certain proportion of the bank's assets are held in reserve in order to be sure it can easily meet its short term liabilities (i.e. to safeguard liquidity). In that regard, the system is a little like fractional reserve banking. But the UK and Canada don't have reserve requirements at all. In general, the main constraint on a bank's lending is its capital. Which is why you read about "core tier 1 capital ratios" when a failing bank makes headlines.

"A bank's reserves are the funds it holds in its account in the central bank."

Are those reserves (capital) fluid? From the tier-1 you refer I get the impression these are real physical assets and in flux. Interesting. How do the UK banks handle market runs? (I must read more about the banking system) In Aus major banks are government backed with minimal competition.

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