Claims, Financial Intermediation and the Development of Financial Systems

Abstract

To understand how financial institutions work it is important to understand the financial environment in which they operate. As the financial environment changes (perhaps because people become more wealthy and therefore save more), so financial institutions must adapt and change if they are to remain successful. So an understanding of the basic ‘mechanics’ by which the desire of savers to earn a return on their funds creates profitable opportunities for financial institutions, is central to the existence of financial systems. This chapter deals with the way in which financial institutions are able to gather savers’ funds and the use to which they put these funds.