Explain the need for restricting banks to lending out only 90 percent of their deposit funds

What will be an ideal response?

Answer: If banks were allowed to lend out of all their deposit money, it would be possible to create as much money as any bank or pair of banks would desire, leading to massive inflation. Furthermore, a string of defaults would cause a system-wide panic as more and more customers realize that their deposits are no longer in physical possession of their banks-or even never really existed in the first place. Holding a reserve, even if it's only 10 percent of the loan amount, is a government regulatory tool as well as a way to help safeguard the depositors' funds.