Why do banks exist in modern society according to the theory of finance?
Sarah Duran
Published Mar 19, 2026
Why do banks and other financial intermediaries exist in modern society, according to the theory of finance? Banks also have been viewed in recent theory as suppliers of liquidity and transactions services that reduce costs for their customers and, through diversification, reduce risk.
Do we even need banks?
Banks have evolved to provide the services we need (or think we need.) That doesn’t mean banks must remain in their traditional form. Yes, we need a safe way to store and transfer money, save for the future or invest. However, financial services need to evolve to keep up with the current pace of change.
What is bank theory?
The financial intermediation theory of banking. In the words of recent authors, “Banks create liquidity by borrowing short and lending long” (Dewatripont, Rochet, & Tirole, 2010), meaning that banks borrow from depositors with short maturities and lend to borrowers at longer maturities.
Why do we need a bank what services do banks provide the major source of income of a bank?
Banks provide various loans and advances to industries, corporates and individuals. The interest received on these loans is their main source of income. 2 Interest on investments: Banks invest in various government and rated securities, and earn interest and dividends from these investments.
What is the main source of bank income?
Interest received
Interest received on various loans and advances to industries, corporates and individuals is bank’s main source of income. 1 Interest on loans: Banks provide various loans and advances to industries, corporates and individuals. The interest received on these loans is their main source of income.
How do bank earn?
Banks make money from service charges and fees. Banks also earn money from interest they earn by lending out money to other clients. The funds they lend comes from customer deposits. However, the interest rate paid by the bank on the money they borrow is less than the rate charged on the money they lend.
