Structure of the Financial System The financial system is complex, comprising many different types of private sector financial institutions, including banks, insurance companies, mutual funds, finance companies, and investment banks, all of which are heavily regulated by the government. If an individual wanted to make a loan to IBM or General Motors, for example, he or she would not go directly to the president of the company and offer a loan. Instead, he or she would lend to such a company indirectly through financial intermediaries, which are institutions that borrow funds from people who have saved and in turn make loans to people who need funds.
Why are financial intermediaries so crucial to well-functioning financial markets? Why do they extend credit to one party but not to another? Why do they usually write complicated legal documents when they extend loans? Why are they the most heavily regulated businesses in the economy? We answer these questions in Chapter 8 by developing a coherent framework for analyzing financial structure in the United States and in the rest of the world