Bank Loans and Marketable Securities: How Do Financial Contracts Control Borrowing Firms?

Mitchell Berlin

Vice President and Economist

July/August 1987

Business Review — Even a close observer of today's financial markets may be bewildered by the ever-changing array of new financial contracts and the shifting fortunes of traditional intermediaries.

But behind all this change, the same basic problem is being solved over and over again by savers, borrowers, and the financial specialists who serve them. Market participants are seeking the most efficient way to transfer the savings of households to firms who need funds. This happens whenever a saver decides to call her broker to purchase securities for her portfolio. The same is true when a firm chooses whether to take out a bank loan or to sell securities to the public.

This article appeared in the July/August 1987 edition of Business Review.

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