ABSTRACT
There are many theories that justify the banks’ role as financial intermediaries. In the typical stylized banking relationship, by intermediating the “investors,” who have abundant financial resources but lack of the expertise of value producing, with the “entrepreneurs,” who have the expertise of generating higher value added goods and service, the banks allocate the scarce resources to the sectors where such resources are best used, improving the social welfare. Here “investors” and “entrepreneurs” have wider meanings than the words themselves. The “investors” are owner of the resources, which can be depositors, pension funds, and so on; the “entrepreneurs” can be the entrepreneurs in the manufacturing firms, but can also be house owners who generate a steady cash flow from their mortgage repayments. Finally, “banks” in modern finance have many faces as well. A “bank” can be a traditional saving bank which takes deposits from individuals and issues loans to the firms, but it can also be an investment bank, a broker–dealer institution trading securities for its customers. There are more “shadow banks” such as money market funds, hedge funds, etc. Although they are not subject to the traditional banking regulatory rules, their role as financial intermediaries is much the same as that of the conventional banks. In the rest of this book, we take the wider view on the parties in the banking relationship. To simplify the discussions, most of the time we use the terms “investors,” “entrepreneurs,” and “bank” as the abstracts of these parties in the banking sector.
