Question

Why do we call a bank a financial intermediary?

a) Banks facilitate transactions between buyers and sellers
b) Banks borrow from depositors and lend to borrowers
c) Banks create money through the lending process
d) Banks provide insurance for financial assets

Answer 1

A bank is called a financial intermediary because it operates between savers who deposit money and borrowers who take loans, lowering transaction costs and facilitating the payment system.

Step-by-step explanation:

We call a bank a financial intermediary due to its role in facilitating economic activities by standing between savers and borrowers. Savers place deposits with banks, earning interest, while borrowers receive loans from banks and pay back with interest. Banks lower transaction costs associated with finding lenders or borrowers, thereby making them a cornerstone of the payment system and playing a critical role in creating money.

Banks function by collecting funds from depositors into one large pool and then lending these funds to borrowers. This not only makes financial transactions safer and easier but also ensures a more effective allocation of resources by funneling capital to businesses and individuals that have promising prospects for repayment.