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Figure 1 is a flow diagram that illustrates the traditional view of how financial markets are used to transfer resources from savers to nonfinancial borrowers through indirect and direct finance. Households are the primary savers, but this group may also include nonfinancial businesses, government sectors, and foreign investors. Borrowers are comprised of nonfinancial businesses, government sectors, households, and foreign borrowers. In indirect finance, savers use financial intermediaries, such as banks, to transfer funds from themselves to borrowers. In this case, savers hold the debt of the financial intermediaries. By contrast, in direct finance savers transfer funds to borrowers through the purchase of debt or equity instruments in the securities markets. In this case, savers hold the debt or equity of the borrower.
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