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IAI Actuarial Core Principles · Business Economics · Role, structure and stability of the financial system

Which of the following best describes the main function of a financial intermediary such as a bank in the financial system?

Banks and other intermediaries channel funds from savers to borrowers and, in doing so, transform the size, maturity and risk of the claims. Central banks, not intermediaries, set policy rates and issue currency, and diversification reduces rather than removes credit risk.

  1. AChannelling funds from savers to borrowers while transforming the size, maturity and risk of the claimsCorrect
  2. BSetting the national inflation target and the policy interest rate
  3. CEnsuring that all investors earn the same return on their savings
  4. DEliminating all credit risk from lending by pooling borrowers into one group
  5. Issuing the national currency and acting as lender of last resort

Explanation

Intermediaries collect deposits from many savers and lend to borrowers, transforming size, maturity and risk. Setting policy rates and issuing currency are central bank functions. Pooling reduces risk through diversification but cannot eliminate credit risk.

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