Certified Financial Management Specialist Practice Exam

What is defined as banks borrowing from depositors and lending to borrowers?

1. Asset Management

2. Credit Intermediation

3. Liquidity Management

4. Risk Assessment

The correct answer is: Credit Intermediation

The definition of banks borrowing from depositors and lending to borrowers is accurately encapsulated by the term "Credit Intermediation." This process is fundamental to the banking system, where banks serve as intermediaries between those who have excess funds (depositors) and those who need funds (borrowers). In credit intermediation, banks accept deposits, which represent a liability for the bank, and use these funds to provide loans to individuals and businesses, representing an asset for the bank. This practice enables efficient allocation of resources in the economy, as banks assess the creditworthiness of potential borrowers, manage the associated risks, and help facilitate transactions that contribute to economic activity. Other concepts mentioned, such as asset management, liquidity management, and risk assessment, play various roles in banking and finance but do not capture the essence of the intermediation function as it relates directly to the lending and borrowing activities of banks. Asset management focuses on managing investment portfolios, liquidity management deals with ensuring that banks have adequate cash flow to meet obligations, and risk assessment pertains to evaluating the potential losses involved in lending and investment activity. These functions are supportive but distinct from the core concept of credit intermediation.