What does the term "bank reserves" refer to in the fractional reserve system?

In the fractional reserve system, "bank reserves" refers to the deposits that banks are required to keep on hand and not lend out. This concept is essential for maintaining liquidity within the banking system and ensuring that banks can meet customer withdrawal demands.

When a bank receives deposits, it is required to keep a percentage of those deposits as reserves, which can be either held in cash or as deposits with the central bank. This reserve requirement helps to stabilize the banking system by preventing banks from lending out all their deposits, which could lead to insolvency if too many customers try to withdraw funds at once. By retaining a portion of deposits as reserves, banks manage risk effectively and comply with regulatory requirements, thereby fostering trust in the financial system.

Other options, like funds allocated for investment in the stock market or money set aside exclusively for emergency loans, do not accurately capture the function of reserves in the banking system. The total amount of loans issued by banks also does not reflect bank reserves, as those loans are typically a portion of the deposits that exceed the reserve requirement. Therefore, the definition related to deposits that banks must keep on hand aligns perfectly with the principles of the fractional reserve banking system.