ABSTRACT
What do banks do in developed capitalist economies? Being the goal and finalité of banking reforms in transition economies, this basic issue will be dealt with first.
Banks are financial intermediaries that focus on taking deposits from savers and providing loans to investors. Apart from this interest-earning core activity, modern banks have engaged in various other intermediary activities, which are mostly fee-earning (investment funds, insurance, etc.). In a “perfect market” with omniscient players and devoid of any transaction costs – admittedly heroic conditions – there would be no need for financial intermediaries. Banks exist due to “market failure”: Given the reality of imperfect information and high search and transaction costs, in an economy without banks the level of fund flows between fund providers and fund users would likely be minor. Banks or credit institutions1 reduce the costs of matching savers and investors, and cut transaction and particularly information and monitoring costs connected to saving/investment deals. Banks thus achieve the transformation of maturities, of risks and of yields (Scialom 2004). Through their institutional capabilities, banks play a compensating job for the limitations of (financial) markets; for instance, they may “bridge” market incompleteness. Thus, one may say that markets are complemented by institutions.
