The Banking System And Global Economy

1308 Words Oct 27th, 2016 6 Pages
The US Banking System
US Banking System and Global Economy
Functions and Roles of US Financial Institutions
Financial institutions are the intermediaries that connect savers with borrowers, providing these parties with access to the financial markets (Cecchetti, 2015, p. 64). In their role as financial intermediaries, the functions these institutions are responsible for help the US economy operate more efficiently. They reduce both transaction and information costs within the financial system by standardizing loan products and borrower screening processes. These institutions also minimize risk for savers by pooling their resources and lending the pooled funds to many borrowers. Doing so meets the needs of savers, who can access their funds when they need them, and borrowers, who can utilize borrowed funds on the terms that best meet their needs
(Cecchetti, 2015, p. 66). It would be much more difficult, and expensive, to match one saver with one borrower who agreed to the exact amount and term of a loan than it is to pool resources and let a specialized institution manage the loans. For example, imagine how difficult it would be to find one individual willing to loan you $20,000 for a period of five years at a 3% annual interest rate so you could purchase a car. Finding a suitable match for your particular needs would be incredibly difficult and expensive, but financial intermediaries are able to provide this service to borrowers and savers every day at a low cost.…
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