A Law and Finance Approach
Chapter 2: The wages of intermediation
<?xml version="1.0" encoding="utf-8"?> <p>What the bank does as a financial intermediary determines its funding dynamics. These activities include extending credit outright, providing payment services, and promising to provide funds in the future at the election of the borrower. This chapter analyzes how funding these activities leaves the bank’s asset-liability structure vulnerable to financial instability, in particular in its short-term liquidity position. The bank’s treasury function can profitably manage these financial risks because of its unrivaled access to liability funding markets. Also, the federal government stands ready to supplement these private sources with a variety of specialized funds available only to banks.</p>
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