Many people take their money to the bank after the end of a business day in order to deposit it. Others have their salaries deposited in the bank at the end of the month—however, not many understand the banking system and how it affects the economy.
The banking system generally holds the financial assets of a people-which is the primary role of the banking system. It also invests this asset to leverage the same for wealth creation. The bank has to hold at least 8% of its deposits and then lend the rest in the form of loans. The money held helps to avoid bank runs, which could be very devastating to the sector if it happens.
Leveraging Financial Assets
The banking system has always been out to make money using different channels other than traditional loans. This, however, increases its leverage risk, and in as much as this helps to solve other risks if it goes wrong, it can sink an entire bank. For example, if a bank invests in aluminium’s future returns and gets vested returns on increasing value, it can prevent aluminium from being sold in a degrading industry. This will consequently affect costs and the economy altogether.