With the PoR system, the exchange's reserves are expected to hold in custody the total amount deposited by its users (or more). If this criterion is satisfied, the exchange can be said to be "fully backed." However, it's important to note that the exchange can't substitute one asset with another. For example, when a user deposits 1 bitcoin, the exchange has to increase its reserves for at least 1 bitcoin, not some other cryptocurrency. Neither can it use its corporate holdings to showcase correct numbers.
PoR stops exchanges from exploring ways to get returns from user assets. For example, PoR prevents exchanges from loaning deposited assets or using deposits for investing.
With PoR, any entity can prove that a crypto exchange holds the entirety of its users' deposits. Therefore, exchanges are naturally encouraged not to mishandle these balances as it would break user trust in them and affect their continuity.