No, no, no. Cryptocurrency fans keep making that up.
In fractional reserve banking, the bank uses deposits to make loans. The loans have collateral behind them, often real estate. There are real assets backing the loans.
That's not how Tether works.
Tether is supposedly invested in "commercial paper", but that has to be fake. If they were really buying commercial paper, they'd be in the top 10 commercial paper buyers. The trading desks that trade short term commercial paper would see billions of dollars of transactions from Tether. Traders report they're not seeing that.
No, the assumption is that the collateral can be liquidated at (1-x%) of loan value, and that the bank has x% in loan reserve capital to make up the losses.
Fractional reserve banks have the assets, just not in liquid enough form that all customers can withdraw their deposits at the same time. For example, some of it is loaned out to various businesses that buy industrial equipment with it, lets say an oven for a big bakery. Over the lifetime of the loan, they can use that equipment to make enough money to repay the money with interest but during the lifetime of the loan the value is 'locked up' in the oven and can't be withdrawn. A non-bankrupt fractional reserve bank always has enough assets but (during a bank run) not always enough liquid assets.
The allegations against Tether are that it is not backed by anything at all, not even illiquid assets. It has so far refused to provide any audited proof that it does and other means of trying to find out (such as reporting by trading desks in a sibling comment) also indicates that there does not seem to be enough money in the pot to redeem all the tokens for their fiat counterparts.
Which is why deposit insurance exists, regulated and mandated by governments. Bank regulators also impose audited capital requirements, reducing the risk that an illiquidity problem (a bank run) becomes an insolvency problem.
Tether has no such guarantees. Since it holds cash and cash-equivalents at far less than a 1:1 ratio compared to its liabilities (issued Tether), participating in the Tether ecosystem is placing an implicit bet that Tether's collateral will remain sound. If it doesn't -- for example if its commercial paper loses value -- then a run on Tether can indeed cause insolvency.
That's not how Tether works.
Tether is supposedly invested in "commercial paper", but that has to be fake. If they were really buying commercial paper, they'd be in the top 10 commercial paper buyers. The trading desks that trade short term commercial paper would see billions of dollars of transactions from Tether. Traders report they're not seeing that.