Fractional reserve banking still means having assets that cover your liabilities; those assets simply may not be liquid (i.e. they are loans that will be paid back over a period of years).

If you don't have assets on your books, and have instead either walked with or lost a large portion of the money, then you're not doing fractional reserve banking, you're running a confidence scheme.

If Tether, as suspected, was largely "backed" by crypto assets and Bitfinex shares, then they're gambling with the bank funds... and the recent losses in the crypto markets mean that they have been losing those bets.

(I edited the last portion of this substantially to make it more concise.)

Two cases

1. You deposit $100 in the bank. It keeps $30 as cash and lends out the rest to someone. The money is still there on the balance sheet (but with a risk that it might not be returned)

2. You deposit $100 with Mr. Paulo in return getting 100USDT. Mr. Paolo spends $70 on private jets and ho*kers. If you ever want back more than $30, you're out of luck.

No, a tether is not accompanied with an iou to the "bank". In fact it's the other way around. If they're not fully covered its simply theft.