A financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds, and stock exchanges. Financial intermediaries reallocate otherwise uninvested capital to productive enterprises through a variety of debt, equity, or hybrid stakeholding structures.[1][2]
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 surplus capital (savers) to those who require liquid funds to carry out a desired activity (investors).[3]
A financial intermediary is typically an institution that facilitates the channeling of funds between lenders and borrowers indirectly.[4] 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.[5] Alternatively, they may lend the money directly via the financial markets, and eliminate the financial intermediary, which is known as financial disintermediation.
In the context of climate finance and development, financial intermediaries generally refer to private sector intermediaries, such as banks, private equity, venture capital funds, leasing companies, insurance and pension funds, and micro-credit providers.[6] Increasingly, international financial institutions provide funding via companies in the financial sector, rather than directly financing projects.[7]
Functions performed by financial intermediariesEdit
The hypothesis of financial intermediaries adopted by mainstream economics offers the following three major functions they are meant to perform:
Creditors provide a line of credit to qualified clients and collect the premiums of debt instruments such as loans for financing homes, education, auto, credit cards, small businesses, and personal needs.
Advantages and disadvantages of financial intermediariesEdit
There are two essential advantages from using financial intermediaries:
Cost advantage over direct lending/borrowing[citation needed]
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)
Various disadvantages have also been noted in the context of climate finance and development finance institutions.[6] These include a lack of transparency, inadequate attention to social and environmental concerns, and a failure to link directly to proven developmental impacts.[8]
Types of financial intermediariesEdit
According to the dominant economic view of monetary operations,[9] the following institutions are or can act as financial intermediaries:
According to the alternative view of monetary and banking operations, banks are not intermediaries but "fundamentally money creation" institutions,[9] while the other institutions in the category of supposed "intermediaries" are simply investment funds.[9]
SummaryEdit
Financial intermediaries are meant to bring together those economic agents with surplus funds who want to lend (invest) to those with a shortage of funds who want to borrow.[10] In doing this, they offer the benefits of maturity and risk transformation. Specialist financial intermediaries are ostensibly enjoying 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. Their existence and services are explained by the "information problems" associated with financial markets.[11]
^ abSiklos, Pierre (2001). Money, Banking, and Financial Institutions: Canada in the Global Environment. Toronto: McGraw-Hill Ryerson. p. 35. ISBN0-07-087158-2.
^O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in Action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 272. ISBN0-13-063085-3.{{cite book}}: CS1 maint: location (link)
^Robert E. Wright and Vincenzo Quadrini. Money and Banking: Chapter 2 Section 5: Financial Intermediaries.[1] Accessed June 28, 2012
^ abInstitute for Policy Studies(2013), "Financial Intermediaries", A Glossary of Climate Finance Terms, IPS, Washington DC
^Eurodad (2012), "Investing in financial intermediaries: a way to fill the gaps in public climate finance?", Eurodad, Brussels
^Bretton Woods Project (2010)"Out of sight, out of mind? IFC investment through banks, private equity firms and other financial intermediaries", Bretton Woods Project, London
^ abc"The currently dominant intermediation of loanable funds (ILF) model views banks as barter institutions that intermediate deposits of pre-existing, real, loanable funds between depositors and borrowers. The problem with this view is that, in the real world, there are no pre-existing loanable funds; and ILF-type institutions do not exist. Instead, banks create new funds in the act of lending, through matching loan and deposit entries, both in the name of the same customer, on their balance sheets. The financing-through-money-creation (FMC) model reflects this, and therefore views banks as fundamentally monetary institutions. The FMC model also recognises that, in the real world, there is no deposit multiplier mechanism." From "Banks are not intermediaries of loanable funds — and why this matters", by Zoltan Jakab and Michael Kumhof, Bank of England Working Paper No 529, May 2015
^"The Role Of Financial Intermediaries" Archived 2015-04-16 at archive.today, Finance Informer website, Australia (accessed 10 June 2015)
Pilbeam, Keith. Finance and Financial Markets. New York: PALGRAVE MACMILLAN, 2005.
Valdez, Steven. An Introduction To Global Financial Markets. Macmillan Press, 2007.
August 29, 2023
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A financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions Common types include commercial banks investment banks stockbrokers pooled investment funds and stock exchanges Financial intermediaries reallocate otherwise uninvested capital to productive enterprises through a variety of debt equity or hybrid stakeholding structures 1 2 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 surplus capital savers to those who require liquid funds to carry out a desired activity investors 3 A financial intermediary is typically an institution that facilitates the channeling of funds between lenders and borrowers indirectly 4 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 5 Alternatively they may lend the money directly via the financial markets and eliminate the financial intermediary which is known as financial disintermediation In the context of climate finance and development financial intermediaries generally refer to private sector intermediaries such as banks private equity venture capital funds leasing companies insurance and pension funds and micro credit providers 6 Increasingly international financial institutions provide funding via companies in the financial sector rather than directly financing projects 7 Contents 1 Functions performed by financial intermediaries 2 Advantages and disadvantages of financial intermediaries 3 Types of financial intermediaries 4 Summary 5 See also 6 References 7 BibliographyFunctions performed by financial intermediaries EditThe hypothesis of financial intermediaries adopted by mainstream economics offers the following three major functions they are meant to perform Creditors provide a line of credit to qualified clients and collect the premiums of debt instruments such as loans for financing homes education auto credit cards small businesses and personal needs Risk transformation citation needed Convenience denominationAdvantages and disadvantages of financial intermediaries EditThere are two essential advantages from using financial intermediaries Cost advantage over direct lending borrowing citation needed Market failure protection The conflicting needs of lenders and borrowers are reconciled preventing citation needed market failureThe 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 Various disadvantages have also been noted in the context of climate finance and development finance institutions 6 These include a lack of transparency inadequate attention to social and environmental concerns and a failure to link directly to proven developmental impacts 8 Types of financial intermediaries EditAccording to the dominant economic view of monetary operations 9 the following institutions are or can act as financial intermediaries Banks Mutual savings banks Savings banks Building societies Credit unions Financial advisers or brokers Insurance companies Collective investment schemes Pension funds Cooperative societies Stock exchanges Money Creation Balance Sheets stylized by commercial banks see Bank of England 2014 According to the alternative view of monetary and banking operations banks are not intermediaries but fundamentally money creation institutions 9 while the other institutions in the category of supposed intermediaries are simply investment funds 9 Summary EditFinancial intermediaries are meant to bring together those economic agents with surplus funds who want to lend invest to those with a shortage of funds who want to borrow 10 In doing this they offer the benefits of maturity and risk transformation Specialist financial intermediaries are ostensibly enjoying 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 Their existence and services are explained by the information problems associated with financial markets 11 See also EditDebt Financial economics Investment Saving Financial market efficiencyReferences Edit Infinite Financial Intermediation 50 Wake Forest Law Review 643 2015 available at http ssrn com abstract 2711379 a b Siklos Pierre 2001 Money Banking and Financial Institutions Canada in the Global Environment Toronto McGraw Hill Ryerson p 35 ISBN 0 07 087158 2 O Sullivan Arthur Sheffrin Steven M 2003 Economics Principles in Action Upper Saddle River New Jersey 07458 Pearson Prentice Hall p 272 ISBN 0 13 063085 3 a href Template Cite book html title Template Cite book cite book a CS1 maint location link Global Shadow Banking Monitoring Report 2013 PDF Financial Stability Board 2013 p 12 ISBN 978 0 07 087158 8 Robert E Wright and Vincenzo Quadrini Money and Banking Chapter 2 Section 5 Financial Intermediaries 1 Accessed June 28 2012 a b Institute for Policy Studies 2013 Financial Intermediaries A Glossary of Climate Finance Terms IPS Washington DC Eurodad 2012 Investing in financial intermediaries a way to fill the gaps in public climate finance Eurodad Brussels Bretton Woods Project 2010 Out of sight out of mind IFC investment through banks private equity firms and other financial intermediaries Bretton Woods Project London a b c The currently dominant intermediation of loanable funds ILF model views banks as barter institutions that intermediate deposits of pre existing real loanable funds between depositors and borrowers The problem with this view is that in the real world there are no pre existing loanable funds and ILF type institutions do not exist Instead banks create new funds in the act of lending through matching loan and deposit entries both in the name of the same customer on their balance sheets The financing through money creation FMC model reflects this and therefore views banks as fundamentally monetary institutions The FMC model also recognises that in the real world there is no deposit multiplier mechanism From Banks are not intermediaries of loanable funds and why this matters by Zoltan Jakab and Michael Kumhof Bank of England Working Paper No 529 May 2015 The Role Of Financial Intermediaries Archived 2015 04 16 at archive today Finance Informer website Australia accessed 10 June 2015 Gahir Bruce 2009 Financial Intermediation Prague Czech Republic a href Template Cite journal html title Template Cite journal cite journal a Cite journal requires journal help Bibliography EditPilbeam Keith Finance and Financial Markets New York PALGRAVE MACMILLAN 2005 Valdez Steven An Introduction To Global Financial Markets Macmillan Press 2007 Retrieved from https en wikipedia org w index php title Financial intermediary amp oldid 1171789310, wikipedia, wiki, book, books, library,
