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Financial Intermediaries

Financial intermediaries channel funds between surplus and deficit agents by transforming assets and liabilities. For example, a bank transforms deposits into loans. This allows financial intermediaries to connect savers with extra money to borrowers who need money. Common types of financial intermediaries include banks, building societies, credit unions, insurance companies, and pension funds. They provide important functions like maturity transformation by converting short-term deposits into long-term loans, risk transformation by spreading risk across multiple borrowers, and convenience denomination by matching small deposits with large loans.

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454 views2 pages

Financial Intermediaries

Financial intermediaries channel funds between surplus and deficit agents by transforming assets and liabilities. For example, a bank transforms deposits into loans. This allows financial intermediaries to connect savers with extra money to borrowers who need money. Common types of financial intermediaries include banks, building societies, credit unions, insurance companies, and pension funds. They provide important functions like maturity transformation by converting short-term deposits into long-term loans, risk transformation by spreading risk across multiple borrowers, and convenience denomination by matching small deposits with large loans.

Uploaded by

Aadil Hanif
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as RTF, PDF, TXT or read online on Scribd
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Financial Intermediaries

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). 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. Types Of Financial Intermediaries Financial intermediaries include: Banks Building societies Credit unions Financial advisers or brokers Insurance companies Collective investment schemes Pension funds 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: Matching small deposits with large loans and large deposits with small loans.

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