The Role of Intermediaries: Banks, Bonds, and Stock Markets

Financial intermediaries such as banks, bond markets, and stock markets reduce the costs of moving savings from savers to borrowers and investors.

Equilibrium in the market for loanable funds does not come about automatically. Savers move their capital, sometimes around the world, to find the highest returns. Entrepreneurs invest time and energy to find the right investments and the right loans. Equilibrium is brought about with the assistance of financial intermediaries such as banks, bond markets, and stock markets.

Financial intermediaries reduce the costs of moving savings from savers to borrowers and help mobilize savings toward productive uses. At its core, a financial intermediary is an institution that helps to bring about the equilibrium in Figure 9.6 and to direct resources to more highly valued uses.