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WHY BANKS ARE SPECIAL
Why are banks considered 'special' compared to other financial intermediaries?
Banks are special because they simultaneously accept deposits from the public and extend credit, creating money in the process, and their failure can trigger systemic risk across the entire economy.
What is the primary function of banks that distinguishes them from ordinary lenders?
Banks accept deposits and channel funds into productive loans.
What is the primary reason banks face a unique liquidity risk not shared by most other firms?
Banks borrow short-term (deposits) and lend long-term (loans), creating a structural maturity mismatch that makes them inherently vulnerable to sudden deposit withdrawals or bank runs.
What is 'narrow banking' and how does it differ from traditional banking?
Narrow banks invest only in safe assets, avoiding credit risk entirely.
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