Chapter 11 - The economics of financial intermediation. In this chapter, students will be able to understand: Financial institutions serve as intermediaries between savers and borrowers, so their assets and liabilities are primarily financial instruments, these institutions pool funds from people and firms who save and lend them to people and firms who need to borrow, intermediaries investigate the financial condition of the individuals and firms who want financing to figure out which have the best investment opportunities. | Chapter Eleven 11- Introduction In Part III we will be focusing on financial institutions and government regulatory agencies. In this chapter we will examine financial institutions’ purpose -- financial intermediation. 11- Introduction Financial institutions serve as intermediaries between savers and borrowers, so their assets and liabilities are primarily financial instruments. These institutions pool funds from people and firms who save and lend them to people and firms who need to borrow. This transforms assets and provides access to financial markets. 11- Introduction Intermediaries investigate the financial condition of the individuals and firms who want financing to figure out which have the best investment opportunities. Intermediaries increase investment and economic growth at the same time that they reduce investment risk and economic volatility. 11- Introduction Without a stable, smoothly functioning financial system, no country can prosper. . | Chapter Eleven 11- Introduction In Part III we will be focusing on financial institutions and government regulatory agencies. In this chapter we will examine financial institutions’ purpose -- financial intermediation. 11- Introduction Financial institutions serve as intermediaries between savers and borrowers, so their assets and liabilities are primarily financial instruments. These institutions pool funds from people and firms who save and lend them to people and firms who need to borrow. This transforms assets and provides access to financial markets. 11- Introduction Intermediaries investigate the financial condition of the individuals and firms who want financing to figure out which have the best investment opportunities. Intermediaries increase investment and economic growth at the same time that they reduce investment risk and economic volatility. 11- Introduction Without a stable, smoothly functioning financial system, no country can prosper. Figure plots a commonly used measure of financial activity--the ratio of credit extended to the private sector and to gross domestic product--against real GDP per capita. We can see that there are not any rich countries with very low levels of financial development. 11- Introduction 11- Introduction The flow of information among parties in a market system is particularly rife with problems. These problems can derail real growth unless they are addressed properly. In this chapter we will discuss some of these information problems and learn how financial intermediaries attempt to solve them. 11- The Role of Financial Intermediaries Financial markets are important because they price economic resources and allocate them to their most productive uses. Intermediaries, including banks and securities firms, continue to play a key role in both direct and indirect finance. Table illustrates the importance of direct and indirect finance. 11- The Role of Financial .
