Financial institutions that accept deposits and make loans are called __.
A) exchanges
B) banks
C) over-the-counter markets
D) finance companies
The correct answer and explanation is :
The correct answer is B) banks.
Explanation:
Financial institutions that accept deposits and make loans are called banks. Banks serve as the core of the financial system and play a critical role in the economy by providing essential services to individuals, businesses, and governments. Banks act as intermediaries between depositors and borrowers, facilitating the flow of money in the economy.
Key Functions of Banks:
- Accepting Deposits: Banks provide various types of accounts (e.g., savings accounts, checking accounts, and certificates of deposit) where individuals and businesses can deposit their funds. These deposits are crucial for banks to function and offer services to the community.
- Making Loans: One of the primary functions of banks is to lend money to individuals, businesses, and governments. These loans are made with the expectation that the borrower will repay the principal along with interest over a period of time. This lending function helps stimulate economic activity, enabling borrowers to invest, purchase goods, and fund other essential activities.
- Interest Rate: Banks typically charge interest on loans and pay interest on deposits. The difference between the interest earned on loans and the interest paid on deposits is a major source of revenue for banks.
- Payment Services: Banks provide essential payment services such as wire transfers, checks, electronic payments, and debit/credit card services, making it easier for individuals and businesses to carry out financial transactions.
- Risk Management: Banks manage financial risks by diversifying their portfolios, setting aside reserves for potential loan defaults, and adhering to regulatory requirements designed to ensure their stability.
Why Not the Other Options?
- A) Exchanges: These are platforms where financial assets like stocks and bonds are bought and sold but don’t directly engage in lending or accepting deposits.
- C) Over-the-Counter Markets: This refers to decentralized markets where trading happens directly between two parties, but this is not a financial institution that accepts deposits or makes loans.
- D) Finance Companies: Finance companies do provide loans, but they typically do not accept deposits from the public. Instead, they raise funds through the issuance of bonds or by borrowing from banks.
Thus, banks are the financial institutions responsible for both accepting deposits and making loans.