With reference to the Full reserve banking and Fractional reserve banking consider the following sta...........

Indian Economic System Money and banking

With reference to the Full-reserve banking and Fractional-reserve banking, consider the following statements

Under full-reserve banking, banks are strictly prohibited from lending out demand deposits received from customers.
Fractional-reserve banking system allows banks to lend more money than the cash they hold in their vaults.

Select the correct statement.

1 only

2 only

Both

None

Full-Reserve Banking v/s Fractional-Reserve Banking

Full-Reserve Banking: Safeguarding Deposits

Under full-reserve banking, banks are strictly prohibited from lending out demand deposits received from customers reducing the risk of bank runs.
Instead, they must always hold 100% of these deposits in their vaults, acting merely as custodians.
Banks serve as safekeepers of depositors' money, charging fees for this service.
Banks can only lend money received as time deposits.

Fractional-Reserve Banking: Expanding Credit and Risk

Fractional-reserve banking system, currently in practice, allows banks to lend more money than the cash they hold in their vaults.
This system relies heavily on electronic money for lending.
Bank runs are a potential risk if many depositors simultaneously demand cash.
However, central banks can provide emergency cash to avert immediate crises.

Hence both statements are correct.