The collapse of Silicon Valley Bank in March 2023 highlighted the potential risks in banking, leading to questions about how banks manage customer deposits. Banks are essential in the financial ecosystem, using deposits to fund loans and investments, aiming to generate profits. This process is crucial for their operation and the services they offer to customers. Banks maintain a fraction of deposits as reserves, a practice that has evolved over time. Previously, federal regulations mandated specific reserve ratios, but recent changes have given banks more flexibility. Despite this, banks still hold reserves to meet withdrawal demands, ensuring they can cover their operational needs and customer withdrawals. The primary use of deposits by banks is to fund various lending and investment activities. These include issuing credit cards, making secured and unsecured loans, and investing in bonds and real estate. Through these activities, banks aim to earn more from loans and investments than what they pay in interest on deposits, thereby securing profits and ensuring the safety of customer deposits.
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  • Understanding Bank Operations: Where Does Your Money Go?
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Understanding Bank Operations: Where Does Your Money Go?

The collapse of Silicon Valley Bank in March 2023 highlighted the potential risks in banking, leading to questions about how banks manage customer deposits. Banks are essential in the financial ecosystem, using deposits to fund loans and investments, aiming to generate profits. This process is crucial for their operation and the services they offer to customers.

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