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p. 262. Financial intermediationlocked

  • John Goddard
  •  and John O. S. Wilson

Abstract

The term financial intermediation refers to the traditional banking business model, under which a bank accepts deposits from savers and lends funds to borrowers. The accumulation of bank deposits and the growth of bank lending are inextricably linked. ‘Financial intermediation’ explains the functions of maturity transformation, size transformation, and diversification. It goes on to outline adverse selection, moral hazard, leverage, and the magnification of return and risk. By acting as a financial intermediary, a bank takes on several types of risk, the two most fundamental types being credit risk and liquidity risk. Other sources of risk in financial intermediation include market risk, operational risk, settlement risk, currency risk, and sovereign risk.

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