Question

1.) What is the role of banks in providing opportunities for participants in the financial system to manage the risks they face?

2.) What is the role of banks in arranging the settlement of commercial transactions

Answer 1

1. Bank is a financial institution that primarily deals with taking deposits of money and giving loans.Apart from this banks also help in managing risks. The individuals have risk with the money that they possess. So banks take deposits from them so that it can be kept safe and secure. The individuals are therefore no longer worried regarding the safety of their hard-earned money. It gives loans to the individuals for purchasing products that require heavy investment. The risk is payment of the loans is born by the bank. The banks therefore have to manage credit risk, market risk and liquidity risk.

As an investment banker, they manage the risk that is faced by companies when they raise money from the markets in the form of IPO (Initial Public Offering). Sometimes, the companies issue bonds and the risk of that is also born by the banks. In this manner, the banks help different participants of the bank to take part in the financial system and benefit from it.

2. One of the essential functions of a bank is its settlement function. A bank acts as a connection between a merchant or seller and a customer. The bank is the mediator through which the customer makes the payment to the seller/merchant. The bank carries out the settlement function on behalf of the merchant by transferring the required amount from the customer to the seller/merchant. In case of delay in payment then the bank acts on behalf of the seller/merchant to ensure that the payment is received.