The Role Of Banks From Non Bank Financial Institutions

Banks are very important in modern society and play a large role in the economy with the potential to send an economy into recession and cause major problems if it doesn’t provide its core services. ‘A bank is a financial intermediary whose core activity is to provide loans to borrowers and to collect deposits from savers’ (Casu, Girardone Molyneux, 2006, p.4). This distinguishes banks from non-bank financial institutions (NBFI), as NBFIs don’t provide all of these services. Both lenders and borrowers have their own requirements when dealing with a bank. Lenders want risk to be minimised including risk of default and assets depreciating and borrows require funds at a specified date for a specific time period, they also want to minimise their costs. (Casu, Girardone Molyneux, 2006, p.5). A bank takes saver’s deposits and turns them into loans to be lent out using maturity, risk and size transformation. Maturity transformation is when the banks uses deposits and capital from the money markets and turns them into long term sources of finance, for example loans and mortgages. Size transformation is when banks take many deposits and put them together to create larger sums to lend to businesses or individuals. Risk transformation is ‘the reduction in risk that can be achieved by diversification of lending and by screening of borrowers’ (Howells Bain, 2007, p.11) Maturity, risk and size transformation are very powerful tools for creating money for banks to lend out whichShow MoreRelatedFinancial Institutions And The Financial System Essay1562 Words   |  7 PagesFinancial institutions Introduction Financial institutions are establishments that conduct financial transactions like investments loans and deposits. Many people all over the world depend on financial institutions on a regular basis through depositing money and exchange of currencies. 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