Question

In what ways are commercial banks of special importance to the money and capital markets and the economy?

Answer 1

• Banks play a very important role of bridging the gap between savers and borrowers. For an economy to function properly, people who need to borrow money must have an avenue to be able to do so. Imagine all the businessmen and entrepreneurs that need capital on a daily basis to keep their businesses up and running. If there was no way for entrepreneurs to raise money, many of the amazing ideas would never have become big businesses.
• Banks help maintain liquidity in the money and capital markets. For capital markets to function smoothly, money has to keep on flowing. If the flow of money were to stop, the consequences can be devastating for the market participants and thousands of people employed in the finance industry. Banks maintain liquidity by providing short terms loans to other banks and financial institutions in order to avoid liquidity crunches.
• Another important function that banks play is enabling payments. Today, we are able to make a payments across the globe in a matter of seconds which is made possible by many intermediaries which includes banks. If banks were to disappear, all economic activity would come to a halt as there would be no way to make payments.