Module 3: Banks and Financial Institutions

These flashcards cover key vocabulary and concepts from Module 3 regarding banks and financial institutions, focusing on financial intermediaries, risks, and economic functions.

Financial Intermediaries

Institutions that channel funds from savings to borrowers, helping to increase investment and reduce financial risk.

Adverse Selection

A situation where lenders cannot accurately distinguish between high-risk and low-risk borrowers, typically occurring before a transaction.

Moral Hazard

The risk that a borrower may engage in risky behavior after obtaining a loan, as their losses are borne by the lender.

Liquidity

The ease with which an asset can be converted into cash or a means of payment.

Collateral

An asset pledged by a borrower to secure a loan and reduce the lender's risk in case of default.

Net Worth

The difference between assets and liabilities of a firm, representing the owner's stake in the firm.

Transaction Costs

Costs incurred in the process of lending and borrowing, including fees, interest, and the time taken to process a transaction.

Diversification

The strategy of spreading investments across various financial instruments to reduce risk.

Screening

The process by which lenders evaluate the creditworthiness of potential borrowers to mitigate adverse selection.

Underwriters

Financial institutions that assess and certify firms seeking to raise capital in financial markets, often through the issuance of stocks and bonds.