Macroeconomics, 2nd Edition by Pearson

FINANCIAL SECTOR REFORMS

385

14.3

The Supply of Loans and

the Demand for Deposits

The supply of credit by financial intermediaries depends on the cost of raising

funds (deposits) and the risks involved in the supply of credit services. The

TWO

TYPES

OF

FINANCIAL

RISKS

that a financial intermediary faces are borrower-specific

risk or idiosyncratic risk and systemic risk. We examine the implications of

these for the supply of loans by banks.

14.3.1

Risk and the Supply of Credit

S

YSTEMIC

RISK

is that risk which is not diversifiable within a given domestic juris-

diction.

14

These risks typically stem from three sources: ...