Why don’t banks keep all the money people deposits in a vault? What do they do with it?

Why don’t banks keep all the money people deposit in a vault?

Have you ever wondered why banks don't keep all the money people deposit in a vault?

What do banks do with the money people deposit?

Answer:

Banks don't keep all the money in a vault. They keep a fraction as reserves and use the rest for various purposes such as lending and investing.

When individuals deposit money in a bank, the bank is required to hold only a fraction of it as reserves. This is known as fractional reserve banking. The rest of the money is used by banks for various purposes, such as lending to individuals and businesses, investing in financial markets, and earning interest.

By utilizing the deposited money for loans and investments, banks promote economic activity and provide financial services to individuals, businesses, and the government. They play a crucial role in facilitating transactions, offering financial products, and supporting economic growth.