I think the current banking system does have a lot of flaws. But I would like to point out that its difficult to compare bitcoin and fiat currency since they operate differently.

One of the purposes of fractional reserve banking is to increase liquidity. You may have heard people speak about the "velocity of money". That's the rate at which money is exchanged between individuals. Money that is moving is doing its job. It's allowing the people to transact. But money can be a store of value as well. So there is incentive to hold onto it until you need to use it. The trick is to balance these so you can achieve both goals. When saving starts to impact the ability of the economy to function problems arise. People will look for more liquid forms of money (credit and cash). And likewise when liquidity incentives start to impact your ability to save problems arise. People will search for better places to save (gold or real estate).

Bitcoin does have great potential for liquidy and a very high velocity. However currently it is most valued as an investment. This means most of it is hoarded. Until it reaches a critical mass and stops growing there is little incentive to spend it.

Fiat currency doesn't have this problem because its inflationary and nobody wants to hold onto it for very long.

I think the fractional reserve system itself isn't inherently broken. I think the problem is actually "twice lent money". It's fine when you lend the money once and its used. But then when the money is deposited into another bank and lent again it is no longer available to be paid back on the same time scale as the initial loan. This means that more money has to be created or people will default on their loans. And defaults do happen because of this. It manifests as the business cycle or economic cycle. You might recognize it as boom/bust cycle. Most of the time its not very noticeable but other times its easy to see.

A little disclaimer: I'm not an economist. But this is how I understand it so take that for what its worth :)

Here's a good explanation of twice lent money and the issues surrounding it.'