Why do financial intermediaries exist?

September 18, 2008 Freakonomics post on "the recent financial upheavals."

Interesting paper by Diamond and Dybvig on the role of banks and bank runs. The basic idea is that bank deposits are a contract between the depositor and the bank. With a "demand deposit" the bank agrees to repay the deposit amount "on demand" - that is, without notice.

The problem is that if depositors expect the bank to fail, they will demand their funds, causing a bank run.

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