Answer & Explanation
C) fractional reserves
Most modern banking systems are based on Fractional reserves.
Fractional-reserve banking is the practice whereby a bank accepts deposits, makes loans or investments, but is required to hold reserves equal to only a fraction of its deposit liabilities. Reserves are held as currency in the bank, or as balances in the bank's accounts at the central bank.
1. In a fractional reserve banking system banks can create money through the lending process.
2. A fractional reserve banking system is susceptible to bank panics.
3. Bank panics are a risk of fractional reserve banking, but are unlikely when banks are highly regulated and lend prudently.