Intermediaries

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Financial intermediation consists of “channeling funds between surplus and deficit agents”. A financial intermediary is a financial institution that connects surplus and deficit agents. The classic example of a financial intermediary is a bank that transforms bank deposits into bank loans.


Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. As such, financial intermediaries channel funds from people who have extra money (savers) to those who do not have enough money to carry out a desired activity (borrowers).


In the U.S., a financial intermediary is typically an institution that facilitates the channeling of funds between lenders and borrowers indirectly. That is, savers (lenders) give funds to an intermediary institution (such as a bank), and that institution gives those funds to spenders (borrowers). This may be in the form of loans or mortgages. Alternatively, they may lend the money directly via the financial markets, which is known as financial disintermediation.



Contents

Advantages of financial intermediaries

There are 2 essential advantages from using financial intermediaries:

  • Cost advantage over direct lending/borrowing[citation needed]
  • Export marketing or Market failure protection the conflicting needs of lenders and borrowers are reconciled, preventing[citation needed] market failure


The cost advantages of using financial intermediaries include:

  • Reconciling conflicting preferences of lenders and borrowers
  • Risk aversion intermediaries help spread out and decrease the risks
  • Economies of scale using financial intermediaries reduces the costs of lending and borrowing
  • Economies of scope intermediaries concentrate on the demands of the lenders and borrowers and are able to enhance their products and services (use same inputs to produce different outputs)



References:

1.http://en.wikipedia.org/wiki/Financial_intermediaries


External Links:

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