Final answer:
Banks function as the intermediary between individual savers, who deposit money, and borrowers, who take out loans. These financial institutions pool the deposited funds and allocate them to various borrowers, smoothing the operation of financial markets.
Step-by-step explanation:
An intermediary functions as the middleman between the individual lender of money and the individual borrower of money. In the realm of financial capital markets, banks serve as a prime example of a financial intermediary. These institutions facilitate the process where a saver deposits funds and a borrower receives a loan.
Through this service, the savers' and borrowers' funds are pooled together, and the bank then allocates these resources to various borrowers in the form of loans. Depositors and borrowers typically do not meet or make direct connections with each other as the bank manages the cumulative deposited funds and their distribution.
Other financial intermediaries include entities like insurance companies and pension funds, which also help to channel funds between savers and borrowers. However, banks are distinct in that they are depository institutions, directly accepting deposits to make them available for lending. This intermediary role by banks is crucial for the smooth functioning of financial markets, as they ensure that savers have secure places to deposit funds while borrowers have access to necessary capital.