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By the end of this section, you will be able to:

  • Explain how banks act as intermediaries between savers and borrowers
  • Evaluate the relationship between banks, savings and loans, and credit unions
  • Analyze the causes of bankruptcy and recessions

The late bank robber named Willie Sutton was once asked why he robbed banks. He answered: “That’s where the money is.” While this may have been true at one time, from the perspective of modern economists, Sutton is both right and wrong. He is wrong because the overwhelming majority of money in the economy is not in the form of currency sitting in vaults or drawers at banks, waiting for a robber to appear. Most money is in the form of bank accounts, which exist only as electronic records on computers. From a broader perspective, however, the bank robber was more right than he may have known. Banking is intimately interconnected with money and consequently, with the broader economy.

Banks make it far easier for a complex economy to carry out the extraordinary range of transactions that occur in goods, labor, and financial capital markets. Imagine for a moment what the economy would be like if all payments had to be made in cash. When shopping for a large purchase or going on vacation you might need to carry hundreds of dollars in a pocket or purse. Even small businesses would need stockpiles of cash to pay workers and to purchase supplies. A bank allows people and businesses to store this money in either a checking account or savings account, for example, and then withdraw this money as needed through the use of a direct withdrawal, writing a check, or using a debit card.

Banks are a critical intermediary in what is called the payment system    , which helps an economy exchange goods and services for money or other financial assets. Also, those with extra money that they would like to save can store their money in a bank rather than look for an individual that is willing to borrow it from them and then repay them at a later date. Those who want to borrow money can go directly to a bank rather than trying to find someone to lend them cash Transaction costs are the costs associated with finding a lender or a borrower for this money. Thus, banks lower transactions costs and act as financial intermediaries—they bring savers and borrowers together. Along with making transactions much safer and easier, banks also play a key role in the creation of money.

Banks as financial intermediaries

An “intermediary” is one who stands between two other parties. Banks are a financial intermediary    —that is, an institution that operates between a saver who deposits money in a bank and a borrower who receives a loan from that bank. Financial intermediaries include other institutions in the financial market such as insurance companies and pension funds, but they will not be included in this discussion because they are not considered to be depository institutions , which are institutions that accept money deposits and then use these to make loans. All the funds deposited are mingled in one big pool, which is then loaned out. [link] illustrates the position of banks as financial intermediaries, with deposits flowing into a bank and loans flowing out. Of course, when banks make loans to firms, the banks will try to funnel financial capital to healthy businesses that have good prospects for repaying the loans, not to firms that are suffering losses and may be unable to repay.

Questions & Answers

What is demand
TECK Reply
the amount of a good that buyers are willing and able to purchase
Asit
what is population
Amadou Reply
The people living within a political or geographical boundary.
Ziyodilla
what happens to price and quantity when demand curves shift to the right
Asha Reply
price level goes up. quantity demand increases
Asit
example- inferior goods
Asit
demand law
Athony
Its states that higher the price the of the commodity, and lower the quantity demanded
Kosiso
I am confused but quantity demand will increase.
Asit
No. That's the law of supply
Kosiso
what happens to price and quantity when supply curve shifts left?
Asha Reply
price level will increase
Asit
quantity demand will decrease
Asit
what is inflation
Pop Reply
inflation is a general and ongoing rise in the level of prices in an entire economy.
cynthia
is the pasistance increase in the price of a country economy
Liyu
kk
Duppy
yes
Aadi
how does inflation affects the economy of a country? what is deflation?
Augustine
deflation can simply be define as the persistence decrease in price of a countrys economy
Liyu
the revenge of malthus relates "revenge" with "commodity prices". collect data for 3 commodoties and check their price evolution
Jamshi Reply
what is elasticity
dubela Reply
Elasticity is an economics concept that measures responsiveness of one variable to changes in another variable.
cynthia
right
Augustine
wooow!!
cynthia
Computer software represents
Mboledi Reply
पर्यावरण राज्यों में से किस राज्य में शिष्य शिक्षक अनुपात 30 से अधिक वाले विद्यालयों का प्रतिशत न्यूनतम होता है
plz Reply
Hey what are you trying to mean?
Kenyana
what is Asset
MUBARAK
like a banana
Ahmed
demand is the process whereby consumers are willing and able to purchase a particular product at various price over a given period of time
Samuel Reply
The law of dinimish
Frank Reply
What is the law of dinimish
Frank
What is the law of dinimish
Frank
What is the law of dinimish
Frank
opportunity cost is to forgo something for another.
jackie Reply
yes
King
what is financial market
Asheeru Reply
what is demand
Levinel Reply
Demand is an economic principle referring to a consumer's desire to purchase goods and services and willingness to pay a price for a specific good or service.
Ali
explain any three exceptions to the law of demand
Emma Reply
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Source:  OpenStax, University of houston downtown: macroeconomics. OpenStax CNX. May 28, 2014 Download for free at http://legacy.cnx.org/content/col11653/1.3
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