We now dive deeper into the mechanics of banking—one of the most important kinds of financial intermediation. Once we recognize how costly it is for people to change currencies or transform their wealth, for example, from cash to more remunerative assets, we recognize the usefulness of banks and how they play an integral role in financial systems.
A Centuries-Old Practice
Banks pursue profitability in a unique way, by transforming liabilities into assets and vice-versa. Liabilities are sums owed to others like the money due to depositors. Assets are sums owed by others, like the interest and principal to be repaid by borrowers. Liabilities are the source of funds, the means by which banks purchase assets. The ...
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