When you deposit CHF 1,000 at a bank, the bank is legally required to hold only a small reserve (a few percent under Basel III liquidity rules) and can lend CHF 950 to another customer. That borrower spends the money, which is re-deposited at another bank, which in turn lends most of it out again. The multiplier effect creates several francs of broad money for each franc of central-bank reserves — this is why the broad money supply (M2, M3) is much larger than the monetary base.
Fractional reserve banking enables credit to flow to businesses and households, which fuels economic growth. The trade-off is fragility: if too many depositors demand cash at the same time, the bank cannot honour all withdrawals because most of the money has been lent out. Deposit insurance, central-bank lender-of-last-resort facilities and Basel III capital and liquidity rules exist precisely to prevent this scenario, known as a bank run.
For depositors the practical implications are: keep balances within the deposit-insurance ceiling, diversify across banks for larger sums, and prefer banks with strong capital ratios (CET1 above 14% is reassuring) and conservative loan books. UBS, ZKB and PostFinance are considered systemically important in Switzerland and benefit from implicit state backing.
Customer A deposits CHF 10,000 at Bank A. Bank A keeps CHF 500 in reserve and lends CHF 9,500 to Customer B. Customer B pays Customer C, who deposits CHF 9,500 at Bank B. Bank B keeps CHF 475 and lends CHF 9,025. After several rounds the original CHF 10,000 has supported close to CHF 100,000 in deposits and loans.