Thursday, May 14, 2009

indirect financing

Indirect financing occurs as a result of financial institution acting as intermediaries,perform the function of channeling saving funds from household(ultimate lenders)to businesses (ultimate borrowers).For example,commercial banks and other depository institutions accept monetary liabilities,such as demand deposits and savings deposits,and insurance companies accept monetary liabilities,such as payment of premiums that obligate the insurance companies to reimburse expected losses.In turn,financial institution purchase assets (relend the funds). for example, commercial banks purchase IOUs from businesses, and thrift institution purchase mortgages from home buyers (this latter transaction implies a relending back to households).

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