What is financial intermediation?

Financial intermediation refers to the function that banks and other financial institutions serve in the economy by connecting those who have excess funds (savers) with those who need funds for various purposes (borrowers). In this process, banks collect deposits from savers, providing them with a safe place to store their money while offering a return in the form of interest. They then use these deposited funds to lend to individuals, corporations, and other entities seeking capital.

This mechanism is crucial for facilitating economic activity, as it allows for the efficient allocation of resources, aids in liquidity management, and helps mitigate risks for both savers and borrowers. By performing this intermediary role, banks contribute to the overall stability and efficiency of the financial system.

The other options, while relevant to banking and finance, do not encapsulate the core concept of financial intermediation. For instance, a method of financing for banking institutions and the management of bank assets and liabilities relate more to the operational aspects of banks rather than the fundamental role they play in connecting savers to borrowers. Regulation of interest rates by central banks focuses on monetary policy and control of inflation, rather than the facilitation of transactions directly between savers and borrowers, thus not aligning with the definition of financial intermed