CHAPTER 1 Introduction

DOI: 10.4324/9780429356773-2

1.1 What Are Banks and Why Are They Special?

Banks are among some of the most important yet sometimes the most controversial institutions in an economy. Banks provide socially desirable services for households, firms, and other financial institutions, but bank failure often costs enormously for taxpayers and economic growth. In this chapter, we will take a brief look inside the banking industry, explain terms and jargon that we will use frequently in the rest of this book, and focus on the features in banking that make banks and the economics of banking special.

According to Encyclopædia Britannica, a bank is “an institution that deals in money and its substitutes and provides other money-related ...

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