Answer:
Because they play a role in the transmission of monetary policy and are one of the government's best tools for gaining economic growth without inflation.
<h3>What is a financial system?</h3>
The financial system is the process by which funds are transferred between those having excess funds(savers) and those needing additional funds(users).
<h3>What are banks?</h3>
A financial establishment that invests money deposited by customers, pays it out when required, makes loans at interest, and exchanges currency. The main function of commercial banks is to accept deposits and then to lend the same money (minus required reserves) back out. Banks make a profit by charging a higher interest rate on loans than the interest rate they pay on deposits. Through the loan process, banks are actually able to create money.
<h3>What is Monetary Policy?</h3>
Monetary Policy is regulating the money supply, controlling inflation/deflation, adjusting the interest rates to regulate the economy, the cost of money, and adjusting the band<u> reserve requirements</u>.
<h3>What is inflation?</h3>
Inflation is a sustained rise in the general price level in an economy over time. This does not mean that the price of every good and service increases, but on average the prices are rising. Therefore constitutes a reduction in purchasing power, where <u>GDP remains constant.</u>
<h3>So in the end, why are banks so important to the financial system and overall, the economy of America?</h3>
A well-functioning financial system is critical to the contemporary economy, and banks play critical roles in society. As a result, they must be safe. In both up and down markets, banks should be able to lend money to people and companies. Payments for products and services should also be completed quickly, securely, and affordably. If banks fail to carry out these responsibilities, the ramifications for the entire economy might swiftly grow so widespread that even the financial sector would be vulnerable to significant shocks. As a result, banks must be able to withstand losses while still meeting their present <u>payment obligations</u>. To do so, banks must adhere to <u>stringent regulatory restrictions</u>. The capital and liquidity (<u>money that can be paid quickly</u>) criteria that banks must fulfill in order to meet their present <em>payment obligations are among them</em>. The banks' internal payment systems must be safe and efficient as well.
