What are the importance of banks in the financial system and the economy of any country?

Answer 1

Banks serve a couple of big functions:

1) Banks provide a safe place to keep your money.

Everybody needs a place to keep their money. If you keep all of it in your pocket, you can be robbed and go from millionaire to penniless in a heartbeat. If you keep it in your mattress, somebody can break in to your house. On the other hand, if you hand it over to a business that has a vault, guards, and people who can keep track of paperwork, it is much safer that it would be in your sock or in your mattress. If the government insures those banks, as the FDIC (Federal Deposit Insurance Corporation) does in the United States, the money is even safe against theft.

2) Putting cash to better use than mattress filler or Return on Investment (ROI.)

Money in a mattress is not earning you money. It is just sitting there, probably getting moldy.

When people drop off their cash at the bank, they understand that the bank is not going to put it all in a vault. The bank gathers large quantities of deposits, and lends money to other customers, who will pay them a certain percentage over and above what they borrowed (interest,) to compensate the bank for the hassle of hiring armed guards and bookkeepers, and the risk of lending them money.

In many cases, the bank will actually pay you to deposit money, in the form of interest earned on your savings account.

3) Meeting place for many buyers and sellers.

Not everybody has a rich uncle they can ask for $100,000 to buy a house. However, most of us have a bank in town to which we could go for a mortgage.

Banks gather tiny amounts of money from hundreds of people, and turn it in to loans for businesses, families and governments. These loans provide the cash needed to start or expand businesses, buy homes, cars, and schooling, and fight wars. Banks can afford to hire people to specialize in evaluating potential borrowers to see if they are likely to be paid back. In doing so, they save hundreds of individuals from having to do the exact same thing.

4) Critical mass=Lower interest rates.

Banks that gather enough assets can afford to invest in a wide-array of projects that produce a real difference in the rate of Return on Investment (ROI). Bigger banks can invest in some slightly more risky projects than smaller ones., because they will not lose as much if these projects do not work out. Riskier projects mean higher ROI, and more cash for the bank's investors. The ROI on a bank's investments determines how much they have to charge regular customers for their loans to break even or make a profit.

Answer 2

can tell me the importance of banks in the financial system