Financial intermediary

{{Main|Financial system}}

{{See also|Financial services|financial market|Circular flow of income|Finance#The financial system}}

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).[http://www.financeinformer.com.au/the-role-of-financial-intermediaries "The Role Of Financial Intermediaries"] {{Webarchive|url=https://archive.today/20150416230828/http://www.financeinformer.com.au/the-role-of-financial-intermediaries |date=2015-04-16 }}, Finance Informer website, Australia (accessed 10 June 2015)

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| first2 = Steven M. | last2 = Sheffrin

| title = Economics: Principles in Action

| url = https://archive.org/details/economicsprincip00osul

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| publisher = Pearson Prentice Hall

| year = 2003

| location = Upper Saddle River, New Jersey 07458

| page = [https://archive.org/details/economicsprincip00osul/page/n288 272]

| isbn = 0-13-063085-3}}

Financial intermediaries thus reallocate otherwise uninvested capital to productive enterprises.

Infinite Financial Intermediation, 50 Wake Forest Law Review 643 (2015), available at: http://ssrn.com/abstract=2711379{{cite book

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| title = Money, Banking, and Financial Institutions: Canada in the Global Environment

| publisher = McGraw-Hill Ryerson

| year = 2001

| location = Toronto

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| isbn = 0-07-087158-2}}

In doing so, they offer the benefits of maturity and risk transformation. In other words, through the process of financial intermediation, assets 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 or a mortgage.Robert E. Wright and Vincenzo Quadrini. Money and Banking: Chapter 2 Section 5: Financial Intermediaries.[http://www.saylor.org/site/wp-content/uploads/2012/06/ECON302-1.2-1st.pdf] Accessed June 28, 2012
• In the corporate context, the form may be take any variety of debt, equity, or hybrid stakeholding structures, extending to private equity and venture capital investments.
• Even in the non-commercial context of project finance, climate finance and development finance, financial intermediaries generally will be from the private sector.Institute for Policy Studies(2013), "[http://climatemarkets.org/glossary/financial-intermediaries.html Financial Intermediaries]", A Glossary of Climate Finance Terms, IPS, Washington DCEurodad (2012), "[http://eurodad.org/1540077/ Investing in financial intermediaries: a way to fill the gaps in public climate finance?]", Eurodad, Brussels

{{cite news |last1=Anton |first1=John |title=Investissement scpi |url=https://comparatif-scpi.fr |access-date=30 July 2022}}

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.{{Cite journal

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The hypothesis of financial intermediaries adopted by mainstream economics offers the following three major functions they are meant to perform:

1. 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.
2. Risk transformation{{citation needed|date=November 2012}}
3. Convenience denomination
4. Commercial banks may provide safe storage for both cash as well as precious metals. {{cite web | url=https://corporatefinanceinstitute.com/resources/economics/financial-intermediary-transactions/ | title=Financial Intermediary }}

There are two essential advantages from using financial intermediaries:

1. Cost advantage over direct lending/borrowing {{Citation needed|reason=no sources given whatsoever|date=January 2011}}
2. Market failure protection; The conflicting needs of lenders and borrowers are reconciled, preventing{{Citation needed|reason=this is a major claim|date=January 2011}} market failure

The cost advantages of using financial intermediaries include:

1. Reconciling conflicting preferences of lenders and borrowers
2. Risk aversion intermediaries help spread out and decrease the risks
3. Economies of scale - using financial intermediaries reduces the costs of lending and borrowing
4. 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)"[http://www.brettonwoodsproject.org/art-567190 Out of sight, out of mind? IFC investment through banks, private equity firms and other financial intermediaries]", Bretton Woods Project, London

According to the dominant economic view of monetary operations,"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 [http://www.bankofengland.co.uk/research/Documents/workingpapers/2015/wp529.pdf "Banks are not intermediaries of loanable funds — and why this matters"], by [http://michaelkumhof.weebly.com/vitae.html Zoltan Jakab] and Michael Kumhof, Bank of England Working Paper No 529, May 2015 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

File:Bank of England Mc Leavy et al. (2014) Banks Money Creation Balance Sheets (failed in consistent description).pngs (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, while the other institutions in the category of supposed "intermediaries" are simply investment funds.

==See also==

• Debt
• Financial economics
• Investment
• Saving
• Financial market efficiency
• Pass-through security

{{Reflist}}

• 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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Category:Financial services organizations