Chapter 8

Financial Intermediation

Gary Gorton    The Wharton School, University of Pennsylvania, and NBER

Andrew Winton    Carlson School of Management, University of Minnesota


The savings/investment process in capitalist economies is organized around bank-like financial intermediaries (“banks”), making them a central institution of economic growth. These intermediaries borrow from consumer/savers and lend to companies that need resources for investment. In contrast, in capital markets investors contract directly with firms, creating marketable securities. The prices of these securities are observable, while financial intermediaries are opaque. Why are banks so pervasive? What are their roles? Are banks inherently unstable? Must the government ...

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