Final answer:
Surplus deposits occur when the amount deposited exceeds required funds, leading to excess capital, which can be reinvested. In the banking industry, fractional reserve banking is practiced, meaning banks don't keep all deposits on hand, opting to lend majority of it for profitability, which creates a risk of bank runs.
Step-by-step explanation:
When an interest rate is above the equilibrium level in the financial market, there is typically an excess supply or surplus of financial capital. This means that there is more capital being offered for investment than there is demand for borrowing. In concrete terms, at a 21% interest rate, there might be $750 billion available to lend, but only a demand for $480 billion. This creates a surplus of $270 billion. A similar surplus situation could arise with deposits and commission entitlements. If a deposit is larger than the commission entitlement, there would be more funds in the account than are immediately required, and this excess could be used to invest further or to cover future payments.
Banks typically do not keep the majority of deposits on hand due to a concept known as fractional reserve banking. Instead, they lend out the majority of their deposits to earn interest, which is a source of their income. They maintain a fraction of deposits as reserves to meet the demands of depositors and make payments. If they kept most of the deposits on hand, banks would earn less from interest, which would affect their profitability. However, this also means that if too many people withdraw their money at once (a bank run), the bank may not have enough cash on hand.