#08-19
The Role of Banks in Financial Systems
Franklin Allen and Elena Carletti, March 2008
Abstract: Banks perform various roles in the economy. First, they ameliorate the information problems between investors and borrowers by monitoring the latter and ensuring a proper use of the
depositors’ funds. Second, they provide intertemporal smoothing of risk that cannot be
diversified at a given point in time as well as insurance to depositors against unexpected
consumption shocks. Because of the maturity mismatch between their assets and liabilities,
however, banks are subject to the possibility of runs and systemic risk. Third, banks
contribute to the growth of the economy. Fourth, they perform an important role in corporate
governance. The relative importance of the different roles of banks varies substantially across
countries and times but, banks are always critical to the financial system.
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