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The bank uses your deposited money to give out loans. They then use the interest on those loans to pay you a slightly smaller interest rate on your deposition, and skim 1-2% for their own profit. In short, when you put your money into a savings account, you are telling the bank to loan your money to qualified borrowers.

If a bank kept a 100% reserve, they would be unable to pay you any interest on your savings, and they would be unable to make any profit. You'd might as well just burying you savings in a hole in the back yard.

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10y ago

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Q: Why don't bank's hold 100 percent reserves?
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