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Financial intermediary
| Investment Dictionary: Financial Intermediary |
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This can include chartered banks, insurance companies, investment dealers, mutual funds, and pension funds.
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| Banking Dictionary: Financial Intermediary |
Financial institution, such as a commercial bank or savings and loan association, that accepts deposits from the public and makes loans to those needing credit. By acting as a middleman between cash surplus units in the economy (savers) and deficit spending units (borrowers), a financial intermediary makes it possible for borrowers to tap into the vast pool of wealth in federally insured deposits-accounting for more than half the financial assets held by all financial service companies-in banks and other depository financial institutions. The movement of capital from surplus units through financial institutions to deficit units seeking bank credit is an indirect form of financing known as intermediation-consumers are net suppliers of funds, whereas business and government are net borrowers. A bank gives its depositors a claim against itself, meaning that the depositor has recourse against the bank (and, if the bank fails, the deposit insurance fund protecting insured deposits), but has no claim against the borrower who takes out a bank loan. See also Disintermediation.
| Real Estate Dictionary: Financial Intermediary |
A firm, such as a bank or savings and loan association, which performs the function of collecting deposits from individuals and investing them in loans and other securities. Also includes credit unions and mutual savings banks. See Disintermediation.
Example: First National Bank serves as a financial intermediary by taking in deposits and placing them in mortgage loans and various securities. In doing so, the bank links individual investors with demanders of credit and the financial markets.
Example: First National Bank serves as a financial intermediary by taking in deposits and placing them in mortgage loans and various securities. In doing so, the bank links individual investors with demanders of credit and the financial markets.
| Law Dictionary: Financial Intermediary |
An institution or organization such as a bank that brings together lenders (in the form of depositors) and borrowers. Other examples include savings and loan associations, credit unions, real estate investment trusts (reits), and various kinds of finance companies.
| Wikipedia: Financial intermediary |
Financial intermediation consists of “channeling funds between surplus and deficit agents”
A financial intermediary is an entity that connects surplus and deficit agents. The classic example of a financial intermediary is a bank that transforms bank deposits into bank loans.[1]
Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities.[2]
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).[3]
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.
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Forms of intermediation
There are 2 forms of intermediation:
- Direct- lenders and borrowers make agreements and channel funds directly among them (fewer options)
- Indirect- funds are channeled by financial institutions (intermediaries)
Lenders and borrowers have conflicting needs
- Most lenders prefer lending short-term
- Most borrowers prefer borrowing long-term
That is why most intermediation is done indirectly, where intermediaries understand and reconcile the different needs of lenders and borrowers.
Functions performed by financial intermediaries
Financial intermediaries provide 3 major functions:
1. Maturity transformation
Converting short-term liabilities to long term assets (banks deal with large number of lenders and borrowers, and reconcile their conflicting needs)
2. Risk transformation
Converting risky investments into relatively risk-free ones. (lending to multiple borrowers to spread the risk)
3. Convenience denomination
Advantages of financial intermediaries
There are 2 essential advantages from using financial intermediaries:
1. Cost advantage- over direct lending/borrowing
2. Market failure protection- the conflicting needs of lenders and borrowers are reconciled, preventing 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)
Types of financial intermediaries
Financial intermediaries include:
- Banks
- Building societies
- Credit unions
- Financial advisers or brokers
- Insurance companies
- Collective investment schemes
- Pension funds
Summary & conclusion
Financial institutions (intermediaries) perform the vital role of bringing together those economic agents with surplus funds who want to lend, with those with a shortage of funds who want to borrow.
In doing this they offer the major benefits of maturity and risk transformation. It is possible for this to be done by direct contact between the ultimate borrowers, but there are major cost disadvantages of direct finance.
Indeed, one explanation of the existence of specialist financial intermediaries is that they have a related (cost) advantage in offering financial services, which not only enables them to make profit, but also raises the overall efficiency of the economy. The other main explanation draws on the analysis of information problems associated with financial markets. [4]
See also
References
- ^ Siklos, Pierre (2001). Money, Banking, and Financial Institutions: Canada in the Global Environment. Toronto: McGraw-Hill Ryerson. p. 35. ISBN 0-07-087158-2.
- ^ Siklos, Pierre (2001). Money, Banking, and Financial Institutions: Canada in the Global Environment. Toronto: McGraw-Hill Ryerson. p. 35. ISBN 0-07-087158-2.
- ^ Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 272. ISBN 0-13-063085-3. http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4.
- ^ Gahir, Bruce (2009), Financial Intermediation, Prague, Czech Republic
Bibliography
- Pilbeam, Keith. Finance and Financial Markets. New York: PALGRAVE MACMILLAN, 2005.
- Valdez, Steven. An Introduction To Global Financial Markets. Macmillan Press, 2007.
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