Fractional reserve banking means that banks are required to _____ .

Fractional reserve banking is a system in which banks are required to keep a fraction of their total deposits as reserves while they are allowed to lend out the remainder. The reserves are typically held in the bank's vaults or deposited with the central bank. This illustrates the principle that banks do not need to keep all customer deposits on hand since only a fraction is usually withdrawn at any given time.

The requirement for banks to keep part of their demand deposits as reserves is crucial for maintaining customer confidence and ensuring liquidity in the banking system. The reserves protect the bank from bank runs, where many customers try to withdraw their money simultaneously. By having a reserve requirement, the banking system can operate smoothly, facilitating lending and creating money through the credit multiplier effect.

The other options suggest either lending all deposits without retaining any reserves, investing in volatile markets, or maintaining no reserves at all, which undermines the very foundation and safety mechanisms of fractional reserve banking.