Wall Street” fulfills an important role for “main street”. It channels funds from savers to borrowers in the most effective way possible. However, its foundations are fragile by construction; for instance, banks borrow short term funds (including deposits) and lend for long terms investment projects. So they may become illiquid if too many deposits are withdrawn on a short notice. They are also exposed to other risks, such interest rate changes and the risk that loans are not repaid (credit risk). The 2007-08 financial crisis in the US and some other advanced economies vividly shows these perils.

Discuss:

What special functions do the banks and other financial intermediaries perform?

Could an economy do as well without money and banks? Why? Explain.

Should the government regulate commercial banks more or less tightly? Why? Discuss.

Answer rating: 100% (QA)

1Special Functions of Banks and Financial Intermediaries Intermediation Banks and financial intermediaries play a crucial role in intermediating between savers and borrowers by channeling funds from s... View the full answer