The banking system you are referring to is known as a fractional reserve banking system. In this system, banks are required to hold only a fraction of the total deposits they receive as reserves. The remaining portion of the deposited funds can be utilized by the bank for lending and other investment activities.
If a bank has a reserve requirement of 10% and receives a deposit of $1,000, it is required to hold $100 (10% of $1,000) as reserves and can use the remaining $900 for lending purposes. This allows banks to create new money by effectively expanding the money supply through the process of lending.
Fractional reserve banking enables banks to earn interest on the loans they make, while depositors can still access their funds whenever they need them. However, it also poses risks, such as the potential for bank runs if depositors lose confidence in the bank's ability to meet withdrawal demands. Regulatory bodies closely monitor and set reserve requirements to maintain stability in the banking system.