Bank Intermediaries

A bank is a financial intermediary that holds assets and issues liabilities, but issues at least two classes of liability — typically, forms of debt and equity — with differing claims to its assets in the event it defaults.’ A bank is like a mutual fund in so far as it is a financial intermediary that invests on its own account, and issues claims against itself to the ‘ultimate’ investors who provide the funds it invests. However, a bank is unlike a mutual fund and like most other large firms in capitalist economies and in so far as it has a capital structure consisting of two or more distinct classes of liability. Indeed, one can think of a bank simply as a debt-andequity-issuing firm that is engaged in the business of financial intermediation, in a manner analogous to the way in which, say, a typical steel-producing company is a debt-and-equity-issuing company engaged in the business of making steel.