Open Yale CoursesECON 252: Financial MarketsLecture 13 - Banking: Successes and Failures<< previous session| next session >>Overview:Banks, which were first created in primitive form by goldsmiths hundreds of years ago, have evolved intocentral economic institutions that manage the allocation of resources, channel information about productiveactivities, and offer the public convenient investment vehicles. Although there are several types of bankinginstitutions, including credit unions and Saving and Loan Associations, commercial banks are the largest andmost important in the banking system. Banks are designed to address three significant problems in capitalmarkets: adverse selection, moral hazard, and liquidity. Banks make money by borrowing long and lendingshort and use fractional reserves to lend more funds than are deposited. History has seen numerous problems
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