Why are banks called “financial intermediaries”?

A bank is a financial institution licensed to receive deposits and make loans, offer various financial services, and ensure the proper functioning of the financial system. Banks also provide other services such as wealth management, currency exchange, and safe deposit boxes. They play a critical role in the economy by channeling resources between savers and borrowers.

Financial intermediaries are institutions that facilitate the transfer of funds between parties that have surplus funds (savers) and those that require funds (borrowers) to invest or consume. By acting as intermediaries, these institutions provide a means for businesses, individuals, and governments to access capital and credit. Examples of financial intermediaries include banks, credit unions, insurance companies, pension funds, and investment companies.

Banks act as financial intermediaries in the following ways: 1. Accepting deposits: Banks accept deposits from individuals, businesses, and governments who have surplus funds. These deposits form the basis of banks' funds, which they use to provide loans and other services to borrowers. 2. Providing loans: Banks use the funds they receive from deposits to provide loans to borrowers, including individuals, businesses, and governments. These loans can be short-term or long-term, depending on the borrower's needs and creditworthiness. 3. Facilitating payments: Banks also act as intermediaries in the payment system, processing transactions like checks, wire transfers, and electronic payments. They make it easier for individuals and businesses to pay for goods and services, as well as to save, invest, and manage their finances. 4. Risk management: Banks also play a crucial role in managing risk, as they can pool the risks of multiple borrowers and diversify their investments. This helps lessen the impact of default on any single loan or asset.

Banks are called financial intermediaries because they facilitate the transfer of funds between parties with surplus funds (savers) and those that require funds (borrowers). They perform crucial functions such as accepting deposits, providing loans, facilitating payments, and managing risks, which enables them to channel resources more efficiently within the economy. Through these intermediary functions, banks drive economic growth and maintain the stability of the financial system.