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The Constrained Sectors: III. Financial Institutions—Financial Stocks

  • Graeme S. Dorrance

Abstract

In the preceding discussion, the process of intermediation was limited to a consideration of financial flows: borrowing and lending. 1 Yet, in practice, intermediaries accept a stock of liabilities and acquire a stock of assets and their most important policy decisions are those related to changes in the structures of their balance sheets that are shifted in response to current stimuli. Hence, analysis of the demand for and supply of financial claims, and the relations between these influences and the demand for physical resources, must be one of portfolio adjustment rather than of current receipts and outlays. However, the major activity of financial intermediaries is the acceptance of short-term and other convenience liabilities and the acquisition of essentially longer-term or other less liquid assets.2 In many instances, the terminologically short-term assets acquired by institutions are, in fact, longterm because they are credits granted on the explicit assumption that they will be renewed or extended on the expiration of their legally enforceable maturity. That is, financial institution balance-sheet structures are similar to the flow structures described above. Therefore, most of the structural considerations applied to the flow of finance also apply to the composition of financial institutions’ assets and liabilities.

Keywords

Interest Rate Monetary Policy Financial Institution Financial Asset Monetary Authority 
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Notes

  1. 17.
    H. C. Wallich, ‘The Current Significance of Liquidity Preference’, Quarterly Journal of Economics, LX (1945–46), p. 493.CrossRefGoogle Scholar
  2. 20.
    W. Riefler, ‘Open Market Operations in Long-term Securities’, Federal Reserve Bulletin (November 1958), p. 1264.Google Scholar
  3. 21.
    Such an explanation is provided in G. S. Dorrance, ‘The Term Structure of Interest Rates’, Staff Papers X (July 1963), pp. 275–98.CrossRefGoogle Scholar

Copyright information

© Graeme S. Dorrance 1978

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  • Graeme S. Dorrance

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