What essential function do banks perform as financial intermediaries?

Banks play a critical role as financial intermediaries by connecting savers with borrowers. This function is essential for the economy as it facilitates the flow of funds between different entities. Savers deposit their money into bank accounts, where it can earn interest, while borrowers, such as individuals or businesses, can access these funds to finance various activities, such as purchasing a home or expanding a business.

This intermediation process allows banks to assess the creditworthiness of potential borrowers, mitigating the risks associated with lending and helping to ensure that funds are allocated efficiently. By pooling the deposits from many savers and lending them out to those who need capital, banks help optimize the use of available resources in the economy, promoting growth and stability.