Financial Institutions, Markets, and Money, Eleventh Edition

CHAPTER ONE

An Overview of Financial Markets and Institutions

THIS BOOK IS ABOUT THE financial system, which consists of financial markets and institutions. The basic role of the financial system is to gather money from individuals and businesses that have more money than they need and route these funds to those who need money now. Businesses need money to invest in productive assets to expand their business, and consumers have a myriad of items they buy on credit, such as automobiles, personal computers, and iPhones. Money is the lubricant that makes an industrial economy run smoothly. Without money, the numerous financial transactions that businesses and consumers take for granted would grind to a halt.

Banks are a critical player in the financial system. Banks provide a place where individuals and businesses can invest their money to earn interest at low risk. Banks take these funds and redeploy them by making loans to individuals and businesses. Banks are singled out for special treatment by regulators and economists because most of what we call money in the economy is represented by deposits and checking accounts issued by banks. Thus, banks are the principal caretaker of the payment system because most purchases are paid by writing a check or making an online payment against a bank account.

The financial system is like a huge money maze—funds flow to borrowers from lenders ...