Banks as Financial Intermediaries

Banks as Financial Intermediaries

Banks are able to lend a major portion of their deposits, and play the role of a financial intermediary and constitute the payment system because of the understanding that banks will honor the commitments that they have made to the people. If this trust is broken for any reason, the banks will not be able to survive. Failure of one bank will lead to the failure of other banks too because their role as a constituent of the payment system make them have substantial dealings with and dependence on each other.

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