Why are banks important players in the financial system?
Fsp Invest, 12 Dec. 2013
Financial institutions like banks play an important role in the financial system. Savers deposit money with banks and borrowers in turn use that money. But that’s only a basic outline of what banks really do. Let’s take a closer look.
How banks facilitate the flow of money
When we talk about a ‘flow of funds’…
We mean the movement of money from the sources of that money, through ‘intermediaries’ such as banks, to sectors that use that money to buy assets.
The ‘sources’ of funds, are the net savers. The ‘users’ are net spenders.
Often, in order for money to flow from net savers to net spenders, it first flows through the bank (or other intermediary).
What the bank does is make two types of financial instruments—one for lenders and one for borrowers.
Through doing this, lenders invest their funds with the bank, and then the bank reinvests these funds with borrowers!
The same principle applies to other types of financial intermediaries.
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