Have you ever ever puzzled the place banks put their cash? Banks are monetary establishments that deal with our cash and assist us maintain it secure. However what do they do with all the cash they obtain in deposits? On this article, we’ll discover the reply to this query in a method that’s simple for teenagers to grasp.
Deposits and Loans
One of many major methods banks earn cash is through the use of the deposits they obtain from prospects to make loans. Whenever you deposit cash right into a checking account, you might be primarily lending cash to the financial institution. The financial institution then makes use of that cash to make loans to different prospects, who pay curiosity on these loans.
For instance, let’s say you deposit $100 into your financial savings account on the financial institution. The financial institution then lends that $100 to somebody who wants a mortgage. That particular person pays curiosity on the mortgage, which the financial institution collects as revenue. The financial institution pays you curiosity in your deposit as nicely, however the rate of interest is normally decrease than the rate of interest charged on loans.
Banks additionally make investments a few of their funds in shares, bonds, and different monetary merchandise to earn a return on their cash. By investing in these merchandise, banks hope to earn a better return than they’d by conserving their cash in low-yielding accounts.
Along with investing in monetary merchandise, banks additionally spend money on their very own operations. They could buy buildings or gear, rent workers, or develop new applied sciences to enhance their providers and appeal to extra prospects.
Lastly, banks are required by legislation to maintain a sure amount of cash readily available to fulfill the calls for of their prospects. This quantity is named the reserve requirement, and it’s set by the Federal Reserve, the central financial institution of the USA.
The reserve requirement ensures that banks have the funds for readily available to fulfill the calls for of their prospects, similar to withdrawing money or making deposits. Banks can maintain these reserves in accounts on the Federal Reserve or in their very own vaults.
In conclusion, banks put their cash to work through the use of deposits to make loans, investing in monetary merchandise and their very own operations, and conserving a sure amount of cash readily available to fulfill buyer calls for. By understanding the place banks put their cash, we will get a greater understanding of how they function and the way our personal cash is getting used.
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