Banks are financial intermediaries between economic agents with surplus funds and those with a shortage of funds and convert short-term deposits into long-term loans.
Banks are institutions that intermediate between agents (households, firms, the government) with surplus funds and those with a shortage of funds. As such, they manage to provide for safe and liquid savings opportunities as well as long-term credit facilities, without the need for those two parties to interact and negotiate a financial contract directly. In this way, they decrease search and other transaction costs, solve potential mismatches between demand and supply in terms of maturity and degree of liquidity, and aim at solving risk and asymmetric information problems. Ultimately, the purpose of financial intermediation by banks is to make finance available for investment, leading to economic growth and financial inclusion, i.e., access to financial services for all.
In the following, we first...
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