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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 the real definition of economics
jegede Reply
Economics is the study of the use and allocation of (scarce) resources
demsurf
Jegede, what is the "non" real definition of economics then?
Ernest
incidence of production there is a choice do you agree? justify
Oduro Reply
What is incidence of production? do u mean incidence of tax?
Aryeetey
I want to know about Richard lipsey and robin as the economist and their definition proposed by them
Musa Reply
what are the causes of scarcity And what are the goal scarcity
Musa
scarcity only exist because human wants are unlimited...if human just know how to be contented then scarcity will not exist
Ylaine
what is ment by possibility curve
Ruzaiq
define accounting?teatly
Ahmed Reply
Is the recording, classifying, interpreting record of all transaction
Yuusuf
is still the act of measuring, interpreting and communicating of financial issues
Yuusuf
measuring business or individual finance
Zeyi
Accounting is the process of collecting,recording,classifying,summarizing and interpreting/presenting financial data to the stakeholders for their economic decision making
asri
hi
Otilina
hi
AVIAH
wat is PPC
ALLAJI
what are the different between need and wants
Musa Reply
the major difference is necessity
Yuusuf
explain any four tool of monetary policy to solve the problem of inflation.
Alicesha Reply
bank rate,open market operation,legal reserve requirement
Johnson
what's marginal utility?
Abena Reply
the additional utility you get if you can consume one more unit of the good x
Luka
Thanks... then what's the law of diminishing marginal utility ?
Abena
The utility decreases with every unit you consume (most of the time). The first unit of consumption will therefore give you the highest utility. Sorry about my english
Luka
Okay... I understand now
Abena
Great!
Luka
hello room
Lawal
one of the leading industrial nations of the world ranking second in manufacturing output after the USA is a. Russia b. Germany c. Britain d. Japan
Lawal
china
Siddharth
japan
Siddharth
good morning
Lamin
hi
Rafiu
hi
nivedha
japan
Ylaine
morning
Adegboye
no other questions?
Ylaine
hii
Dipun
I am from India
Dipun
same question are not mentioned
Dipun
first you give my answer
Dipun
hi
adelakun
welcome
Ahmed
dipun naik
Ahmed
whats your question
adelakun
whats your question
adelakun
I am from India
Dipun
retype the questions
adelakun
marginal untility is the last point desire of a consumer that gets benefit from related good/ service.
Saboor
Why are some countries rich and why are some countries poor? . is poorness a human cause?
Yacquub
well several factors are included...it's not just because of human..
Ylaine
what is a correct reason
Vijay
Japan
Lawal
countries which are rich they are developed countries they have good resources minerals technology power knowledge to use the resources poor countries are under developing countries they have lack of resources, knowledge and if they have these so they dont know the use of these resources.
Siddharth
so these knowledgeable people move /migrate to the other rich/developed countries
Siddharth
Poverty of a country is also related to cultural, economical, and military domination. Usually, the dominant country imposes all of these powers when diplomatically needed or sometimes by force.
Ernest
You can also have considerable poverty in a rich country when such poverty is measured within sectors of its population. In other words, economic indicators can sometime mask such poverty.
Ernest
For example, the U.S.A. has a very high measure of GDP per capital, but millions of Americans ( a considerable amount are children) live in poverty.
Ernest
So poverty is not an easy social phenomenon to pin down neatly into one social realm or another.
Ernest
pls what is price ceiling
jasmine
its the max price a seller can charge for a product, mostly imposed by the government to protect the consumer
Luka
its the max price a seller can charge for a product, mostly imposed by the government to protect the consumer plus it must be imposed below the equilibrium price in order to be effective. A shortage will also be created after its imposition.
Zafar
can happiness be measured?
Ylaine
Happiness is too subjective to be measured as an economic phenomenon or reality. I think that happiness happens at several levels of the human condition: biological, psychological, intellectual and at the level of the soul. How can economic theory be scientific about it?
Ernest
about I have read of something called gross happiness index.
Ylaine
Germany
Arthur
what's Neo classical definition of economic
Mohammed
hi
ALLAJI
economic is a social science studied as a relationship between end and needs scarce which have alternative uses
ALLAJI
what's equilibrium
Daniel
What is economies of scale
Jeremiah Reply
In microeconomics, economies of scale are the sum of total costs saved or that a firm has advantage over its competitors due to its scale of operations. More specifically, it is the firm's cost savings per unit of output that it gains as its production increases in scale.
Ernest
one of the leading industrial nations of the world ranking second in manufacturing output after the USA is ......... a. Russia b. Germany c. Britain d. Japan
Lawal
what is supply of demand?
Joseph Reply
supply of demand?
Yuusuf
1)importance of internal trade. 2) international trade barriers 3) principles of international trade
umar Reply
how can tell me about the GDP
Mahmood
explain the basic economic concept using ppc ?
Nurul Reply
scarcity can be represented by imagining a country producing only 2 goods and the resources to do so are fixed, hence a choice must be made and how to divide the limited resources between the two goods. you can choose any combination of the two goods that fall directly on the curve which represents
Justin
maximum efficiency and the highest possible output at this point in time. if you choose to not utilize all the resources then you will be inefficient (not to your best ability) and produce below the curve. however if you have increases in technology or find new resources you can shift the curve out
Justin
Please what is meant by resources allocation
albert Reply
Please I need explanation about resources allocation
albert
what is cost
Mohit Reply
Cost:-is the sacrifice or measured price paid to acquire, produce or maintain a good or service
Yuusuf
exactly
Emmanuel
thanks
Yuusuf
To what extend is labour, capital, land and entrepreneur considered as free good
Prince
#what is public finance
Ryan Reply
public finance is the study of how the government generates and spends to facilitate the day to day operations. simply put its an analysis of the income/expenditure statement of the government and how it affects welfare
Justin
#kk fenks
Ryan
you say it all
Emmanuel
what is economic model
chantal Reply
it may differ as different economist model ,but as to me it is a formal presentation of economic theory.
miidhagaa
what are the factors affecting utility
Silas

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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