Question

Suppose Alyssa comes into a large sum of money and decides to lend it out to earn interest on it. Because she lacks the expertise to evaluate the credit risks of potential borrowers. she decides to deposit the money in her local bank, a financial intermediary. This is an example of how financial intermediaries can help solve the problem of:

Answer 1

Banks act as financial intermediaries by pooling funds from savers and lending them to creditworthy borrowers, thus solving the problem of credit risk assessment for individual savers.

Step-by-step explanation:

Banks act as financial intermediaries by accepting deposits from savers and lending those funds to borrowers. In the case of Alyssa, depositing her money in a local bank allows her to earn interest on her savings while avoiding the need to evaluate the credit risks of potential borrowers.

Financial intermediaries like banks help solve the problem of credit risk assessment for individual savers. By pooling funds from multiple savers, banks can diversify their lending portfolios and evaluate the creditworthiness of borrowers on behalf of the savers. This reduces the risks associated with lending money directly to individual borrowers.

By depositing her money in the bank, Alyssa can earn interest on her savings while having the assurance that her funds are being lent to creditworthy borrowers.