# The Banking System **The banking system** is the network of institutions that take deposits, make loans, and run the payments through which money actually moves — the plumbing of everyday finance. Its defining mechanic is **fractional-reserve banking**: banks hold only a fraction of deposits in reserve and lend the rest, which means the act of lending *creates* money (deposits) in the economy. This makes banks uniquely powerful and uniquely fragile — powerful because they expand the money supply through credit, fragile because they promise depositors instant access to money that is, at any moment, mostly lent out. That maturity mismatch is the permanent source of **bank runs**. The United States runs a **dual banking system**: banks may hold either a national charter (supervised by the [[OCC]]) or a state charter, with the [[Federal Reserve]] supervising holding companies and the [[FDIC]] insuring deposits and resolving failures. Two New Deal inventions stabilized this structure — federal **deposit insurance** (which stops runs by guaranteeing small deposits) and the Fed's role as **lender of last resort** (which lends to solvent banks in a panic). Both are also classic sources of [[Moral Hazard (Term)]]: a backstopped bank has weaker incentives to manage its own risk, which is why deposit insurance comes paired with [[Financial Regulation]] and capital requirements. For the KB, the banking system is where abstract finance becomes politically concrete. The 2023 collapse of [[Silicon Valley Bank]] showed the run dynamic in real time — and showed how fast the federal backstop extends to politically-connected depositors. The [[2008 Financial Crisis]] entrenched [[Too Big to Fail]], the doctrine that the largest banks cannot be allowed to collapse, fusing private profit with public guarantee. And the contemporary right-wing fight runs through banking's edges: [[Debanking]] and [[Operation Choke Point 2.0]] (claims that regulators pressure banks to cut off disfavored industries — crypto, gun dealers, conservatives), the crypto movement's bid to route around banks entirely via [[Stablecoin]]s, and the steady deregulatory loosening of capital and supervision standards under industry pressure and [[Regulatory Capture]]. ## See Also - [[Monetary Policy]] - [[Financial Regulation]] - [[Shadow Banking]] - [[Federal Reserve]] - [[FDIC]] - [[OCC]] - [[Financial System Hub]]