Hello there,
Welcome to another week with your financial literacy plug, CoachMO.
Let me start with something most people never realize.
Every time you swipe your card, deposit money in a bank, apply for a loan, or even complain about rising prices at the grocery store, you are interacting with a financial system you were probably never taught about.
It’s called reserve banking.
You won’t see it on your bank app. No one talks about it at dinner tables. Yet it quietly shapes the entire financial environment around you. It influences how much money circulates in the economy, how easily people can borrow, and why inflation sometimes feels like an invisible tax on your savings.
In many ways, it’s one of the most powerful financial systems operating in plain sight, yet largely misunderstood by the very people it affects every day.
Today, let’s pull back the curtain and understand how it actually works.
Start Here: Where Does Money Actually Come From?
Most people assume that when you deposit money into a bank, the bank holds it safely until you need it back. That is not what happens.
When you deposit $1,000, your bank keeps a small slice called a “reserve” and lends the rest out to someone else. That borrower spends their loan, and the person who receives that money deposits it into their own bank. That bank then keeps its small slice and lends the rest out again. And again. And again.
One deposit of $1,000 can travel through the banking system and generate $10,000 or more in total lending activity. The banks are not printing physical cash. They are creating new money electronically, through a chain of loans.
This is called fractional reserve banking. “Fractional” because banks only keep a fraction of your deposit. The rest is working in the economy as someone else’s loan.
Think of it like this: imagine ten neighbours share one umbrella, because statistically, they are never all going out at the same time. The umbrella works until the day it rains for everyone simultaneously. That is the fundamental tension at the heart of this system.
Who Sets the Rules?
Central banks set the rules. In the United States, that is the Federal Reserve. In the UK, it is the Bank of England. In Europe, it is the European Central Bank. In Canada, the Bank of Canada.
These institutions decide what percentage of deposits a bank must keep in reserve. That percentage is called the reserve requirement.
If the reserve requirement is 10%, a bank receiving your $1,000 deposit must keep $100 and can lend out $900. If it is 1%, the bank keeps $10 and lends $990. If it is 0%. There is effectively no mandatory limit on lending at all.
And here is the jaw-dropping reality of where the world’s major economies stand right now.
The G7’s Quiet Revolution Nobody Told You About
The G7 countries, the United States, the United Kingdom, Canada, Germany, France, Italy, and Japan, are the most economically powerful nations on earth. Here is what their reserve requirements actually look like today:
United States: 0%. In March 2020, during the COVID-19 pandemic, the Federal Reserve reduced the requirement to zero. A rule that had governed American banking for over a century was eliminated almost overnight.
Canada: 0%. They removed reserve requirements back in 1992, three decades ahead of America.
United Kingdom: No formal requirement. Banks operate under flexible liquidity rules instead.
Japan: Between 0.05% and 1.3%, depending on the bank type. Effectively near zero.
Eurozone (Germany, France, Italy): 1%. The only G7 bloc is maintaining a meaningful minimum, though still very low by historical standards.
The trend is unmistakable. The world’s most powerful economies have quietly moved away from requiring banks to hold meaningful reserves. They have replaced those rules with more complex frameworks involving capital ratios and liquidity buffers, but the practical outcome is the same: banks can create a lot more credit than at any point in modern history.
Why Did This Happen, And Why Does It Matter?
After the 2008 global financial crisis, governments needed to restart their economies fast. The tool they reached for was cheap, plentiful credit. Low interest rates. Massive lending. And progressively reduced reserve requirements that gave banks more room to lend.
It worked in the short term. Asset prices rose. Stock markets soared. Real estate boomed. The economy grew.
But more money chasing the same goods eventually means one thing: prices go up. That is inflation. And by 2022, inflation had reached levels not seen in 40 years across the US, UK, and Europe. Central banks slammed the brakes by raising interest rates faster than they had in a generation.
That sudden shift exposed cracks. Silicon Valley Bank, one of America’s most prominent technology-focused banks, collapsed in March 2023. It had loaded up on long-term bonds when rates were low. When rates spiked, those bonds lost value. Confidence evaporated. Depositors rushed to withdraw. The umbrella could not cover everyone at once.
The system had worked until it didn’t.
What This Means for You and Your Portfolio
You do not need to work in finance to feel the effects of reserve banking. Here is where it touches your real life:
Your mortgage or rent payment is tied to interest rates, which central banks use to manage how much lending and, therefore, how much money flows through the system. When the Fed raises rates, borrowing gets more expensive for everyone.
Your savings account losing ground to inflation is a direct consequence of decades of money expansion through the reserve system. More money in circulation means each dollar buys slightly less over time.
Your grocery bill, fuel costs, and everyday expenses rise partly because expanded credit driven by loose reserve policy puts more money into the economy and pushes prices upward.
Your community’s access to loans and credit is shaped by how much capacity banks have to lend, which reserve requirements directly control.
This is not abstract. This is your financial life.
CoachMO’s Takeaways:
What You Should Do With This Knowledge
Understanding this system is step one. Acting on it is step two. Here is what matters most:
1. Hold assets, not just cash. Cash sitting in a savings account loses purchasing power every year when money creation outpaces interest earned. Invest in assets that grow with or ahead of inflation, diversified index funds, real estate, gold, or a mix tailored to your situation. Your savings account is a resting place, not a wealth-building strategy.
2. Know where your money is. In a zero-reserve environment, the health of your bank matters more than ever. Check that your deposits fall within insured limits, $250,000 per account in the U.S. (FDIC), £85,000 in the UK (FSCS). Do not assume all banks are equal.
3. Understand the credit cycle. When borrowing is cheap and money is plentiful, asset prices rise. When rates go up and credit tightens, prices correct. Recognising which phase you are in helps you make smarter decisions, whether buying a home, investing, or planning a business.
4. Protect against inflation structurally. This is especially critical for diaspora families managing money across borders. Every time you send a remittance, exchange currency, or save in a local currency, reserve banking and inflation dynamics affect the value you receive. Diversify across currencies and asset classes where possible.
5. Keep learning. The single greatest financial advantage any person can develop is understanding how the system actually works, not how they assume it works. Most people never question where money comes from. The moment you do, everything changes.
The reserve banking system is not going away. It is the infrastructure your money lives inside. Learning to navigate it rather than being silently shaped by it is one of the most powerful financial decisions you can make.
Until Next Time,
CoachMO
Your Financial Literacy Plug
