Chapter 6: Banks

Abstract

Banking is a particular model of financial intermediation whereby one institution takes in liquid deposits and makes longer-term, generally illiquid, loans. This is a very specific and potentially unstable form of financial intermediation. Nonetheless, it is ubiquitous over time and across countries. This chapter reviews the reasons why banks exist and are so important, and what impact they have on the real economy. It concludes with a discussion of stablecoins and central bank digital currencies, which are closely related to banking.