Chapter 4

Financial Institutions

Abstract

Financial institutions play a key role in addressing problems of information asymmetry, adverse selection, and moral hazard. Commercial banks fundamentally take deposits and make loans, but provide other retail, commercial, and global wholesale services. Investment banks perform two basic functions: providing an array of services for corporations and governments needing funds, and performing services as brokers and dealers to investors. Some significant business areas are trading, research, merger and acquisition services, capital raising, and asset securitization. Central banks have slightly different roles in different countries. The US Federal Reserve System oversees and regulates financial institutions, ...

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