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, insurance and pension funds, pooled investment funds, leasing companies, and stock exchanges. The financial intermediary thus facilitates the indirect channeling of funds between, generically, lenders and borrowers. That is, savers (lenders) give funds to an intermediary institution (such as a

bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...

), and that institution gives those funds to spenders (borrowers). When the money is lent directly - via the

financial market A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial marke ...

s - eliminating the financial intermediary, this is known as financial

disintermediation Disintermediation is the removal of intermediary, intermediaries in economics from a supply chain, or "cutting out the middlemen" in connection with a transaction or a series of transactions. Instead of going through traditional distribution cha ...

Economic function

Financial intermediaries, as outlined, essentially, channel funds from those who have surplus capital ( savers) to those who require liquid funds to carry out a desired activity ( investors). Financial intermediaries thus ''reallocate'' otherwise uninvested capital to productive enterprises. In doing so, they offer the benefits of maturity and risk transformation. In other words, through the process of financial intermediation,

assets In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can b ...

or liabilities may be transformed into assets or liabilities with (very) different risk and payment profiles. *In the personal finance context, the instrument in question will be in the form of a

loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...

or a

mortgage A mortgage loan or simply mortgage (), in civil law (legal system), civil law jurisdictions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners t ...

. *In the corporate context, the form may be take any variety of debt, equity, or hybrid stakeholding structures, extending to

private equity Private equity (PE) is stock in a private company that does not offer stock to the general public; instead it is offered to specialized investment funds and limited partnerships that take an active role in the management and structuring of the co ...

and

venture capital Venture capital (VC) is a form of private equity financing provided by firms or funds to start-up company, startup, early-stage, and emerging companies, that have been deemed to have high growth potential or that have demonstrated high growth in ...

investments. *Even in the non-commercial context of project finance, climate finance and development finance, financial intermediaries generally will be from the

private sector The private sector is the part of the economy which is owned by private groups, usually as a means of establishment for profit or non profit, rather than being owned by the government. Employment The private sector employs most of the workfo ...

.Institute for Policy Studies(2013),
Financial Intermediaries
, A Glossary of Climate Finance Terms, IPS, Washington DC The prevalence of these intermediaries, relative to disintermediated transactions, is explained in that specialist financial intermediaries ostensibly enjoy a cost advantage in offering financial services; this not only enables them to make profit, but also raises the overall efficiency of the economy. Their existence and services are then explained by the "information problems" associated with financial markets.

Functions performed by financial intermediaries

The hypothesis of financial intermediaries adopted by

mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis for discussion. Also known as orthodox economics, it can be contrasted to ...

offers the following three major functions they are meant to perform: #

Creditor A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some propert ...

s 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 # Convenience denomination # Commercial banks may provide safe storage for both cash as well as precious metals.

Advantages and disadvantages of financial intermediaries

There are two essential advantages from using financial intermediaries: # Cost advantage over direct lending/borrowing # 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 In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of Productivity, output produced per unit of cost (production cost). A decrease in ...

- 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. These include a lack of transparency, inadequate attention to social and environmental concerns, and a failure to link directly to proven developmental impacts.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

Types of financial intermediaries

According to the dominant economic view of monetary operations,"The currently dominant intermediation of loanable funds (ILF) model views banks as

barter In trade, barter (derived from ''bareter'') is a system of exchange (economics), exchange in which participants in a financial transaction, transaction directly exchange good (economics), goods or service (economics), services for other goods ...

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 sheet In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...

s. 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." Fro
"Banks are not intermediaries of loanable funds — and why this matters"
b

and Michael Kumhof,

Bank of England The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694 to act as the Kingdom of England, English Government's banker and debt manager, and still one ...

Working Paper No 529, May 2015 the following institutions are or can act as financial intermediaries: *

Bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...

s * Mutual savings banks * Savings banks *

Building societies A building society is a financial institution owned by its members as a mutual organization, which offers banking institution, banking and related financial services, especially savings and mortgage loan, mortgage lending. They exist in the Unit ...

Credit union A credit union is a member-owned nonprofit organization, nonprofit cooperative financial institution. They may offer financial services equivalent to those of commercial banks, such as share accounts (savings accounts), share draft accounts (che ...

s * Financial advisers or brokers *

Insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to protect ...

companies * Collective investment schemes *

Pension fund A pension fund, also known as a superannuation fund in some countries, is any program, fund, or scheme which provides pension, retirement income. The U.S. Government's Social Security Trust Fund, which oversees $2.57 trillion in assets, is the ...

s * Cooperative societies * Stock exchanges According to the alternative view of monetary and banking operations, banks are not intermediaries but "fundamentally money creation" institutions, while the other institutions in the category of supposed "intermediaries" are simply

investment fund An investment fund is a way of investment, investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. These ad ...

References

Bibliography

*Pilbeam, Keith. Finance and Financial Markets. New York: PALGRAVE MACMILLAN, 2005. *Valdez, Steven. An Introduction To Global Financial Markets. Macmillan Press, 2007. {{Authority control Financial services organizations