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Economic Perspectives, Vol. 10, No. month, 1986
A primary function of financial intermediaries is to facilitate the flow of capital from savers to borrowers. Financial institutions exist because they can do this at a lower cost than would be possible through direct financing arrangements. Banks and other depository institutions perform this intermediary function by making loans and accepting deposits. Sometimes, however, a financial intermediary's demand for loans at a given rate is greater than its supply of deposits, in which case it may purchase fed funds or other uninsured deposits, sell securities under repurchase agreements, sell short-term securities such as commercial paper or bankers acceptances or sell assets such as government securities or loan.
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