Framework
Flow of funds in the financial system
The question it answers
When a business owner needs to raise capital, should they go direct through financial markets or indirectly through banks, and who bears the screening cost?
- Origin
- Gurley and Shaw (1960); Mishkin (2022); intermediation theory in Akerlof (1970) and Diamond (1984)
- Diagram type
- Comparison table
- Level of analysis
- Industry
- Topics
- Corporate finance
Diagram
Flow of funds in the financial system
| Criterion | Direct finance | Indirect finance |
|---|---|---|
| Route | Savers to markets to borrowers | Savers to intermediaries to borrowers |
| Who bears screening cost | Investors | The intermediary |
| Examples | Bonds, shares | Bank loans, funds, insurance |
Sources
References
Listed A–Z by author surname, Harvard style. A source with a DOI links to https://doi.org/…; one without links to its page or says plainly that it has no DOI.
- Akerlof, G.A. (1970) ‘The market for 'lemons': quality uncertainty and the market mechanism’, Quarterly Journal of Economics, 84(3), pp. 488–500.doi:10.2307/1879431Source page
- Diamond, D.W. (1984) ‘Financial intermediation and delegated monitoring’, Review of Economic Studies, 51(3), pp. 393–414.doi:10.2307/2297430Source page
- Gurley, J.G. and Shaw, E.S. (1960) Money in a Theory of Finance. Washington, DC: The Brookings Institution.No DOISource page
- Mishkin, F.S. (2022) The Economics of Money, Banking, and Financial Markets, 13th edn. Harlow: Pearson.No DOISource page