Reserves are the cash on hand available to pay people able to demand it. Since in practice, except during a run, only a fraction of a bank's liabilities are called in at any given time, it is safe to keep less cash on hand than the entire amount that could be withdrawn instantly.
The rest is converted to assets with equivalent value that have worse than instant liquidity, but a higher return on investment. This keeps the balance sheet honest with respect to the total value of assets and liabilities, but technically, the bank cannot honor all of its commitments in the worst case scenario. That's fractional reserve.
Mt. Gox does not even have the imaginary, illiquid assets to balance out its depositor liabilities. That makes it bankrupt, not fractional reserve.
> Mt. Gox does not even have the imaginary, illiquid assets to balance out its depositor liabilities. That makes it bankrupt, not fractional reserve.
Strictly speaking, it makes them insolvent. The fact that they are insolvent is the reason they have sought the protection offered by bankruptcy, but the two states are distinct.
While the terms are easily distinguishable to a lawyer, to others, they are practically synonymous, with insolvency nuanced towards being a temporary condition and bankruptcy nudged towards a more permanent or intractable failure.
The implication is that an insolvent person could become solvent by immediate application of better financial management, but a bankrupt person has no choice but to default on a portion of his debts or other financial obligations. Bankruptcy is the noun/adjective descibing what the court does with bankrupt people and businesses.
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The rest is converted to assets with equivalent value that have worse than instant liquidity, but a higher return on investment. This keeps the balance sheet honest with respect to the total value of assets and liabilities, but technically, the bank cannot honor all of its commitments in the worst case scenario. That's fractional reserve.
Mt. Gox does not even have the imaginary, illiquid assets to balance out its depositor liabilities. That makes it bankrupt, not fractional reserve.