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Financial Intermediaries and Their Functions

Financial intermediaries facilitate the efficient allocation of funds between lenders/investors and borrowers when direct dealings are difficult. They obtain funds from lenders/investors and lend or invest those funds to borrowers, creating more favorable transaction terms. Financial intermediaries transform less desirable financial assets into their own liabilities that are more preferred by the public, providing maturity intermediation, risk reduction through diversification, and lower contracting and information processing costs.

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Brandon Lumibao
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138 views2 pages

Financial Intermediaries and Their Functions

Financial intermediaries facilitate the efficient allocation of funds between lenders/investors and borrowers when direct dealings are difficult. They obtain funds from lenders/investors and lend or invest those funds to borrowers, creating more favorable transaction terms. Financial intermediaries transform less desirable financial assets into their own liabilities that are more preferred by the public, providing maturity intermediation, risk reduction through diversification, and lower contracting and information processing costs.

Uploaded by

Brandon Lumibao
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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1.3.

Financial intermediaries and their functions


Financial intermediary is a special financial entity, which performs the
role of efficient allocation of funds, when there are conditions that
make it difficult for lenders or investors of funds to deal directly with
borrowers of funds in financial markets. Financial intermediaries
include depository institutions, insurance companies, regulated
investment companies, investment banks, pension funds.
The role of financial intermediaries is to create more favourable
transaction terms than could be realized by lenders/investors and
borrowers dealing directly with each other in the financial market.
The financial intermediaries are engaged in:

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 obtaining funds from lenders or investors and  lending or investing
the funds that they borrow to those who need funds.
The funds that a financial intermediary acquires become, depending on
the financial claim, either the liability of the financial intermediary or
equity participants of the financial intermediary. The funds that a
financial intermediary lends or invests become the asset of the financial
intermediary.
Financial intermediaries are engaged in transformation of financial
assets, which are less desirable for a large part of the investing public
into other financial assets—their own liabilities—which are more widely
preferred by the public.
Asset transformation provides at least one of three economic functions:
 Maturity intermediation.  Risk reduction via diversification.  Cost
reduction for contracting and information processing.

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