Topics: Financial services, Financial intermediary, Economics Pages: 4 (994 words) Published: April 9, 2014

Financial intermediaries

Done by Mirmanova S.,
303 gr.

Almaty 2014

A financial intermediary is a financial institution that connects surplus and deficit agents. The classic example of a financial intermediary is a bank that consolidates deposits and uses the funds to transform them into 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 or surplus savings (savers) to those who do not have enough money to carry out a desired activity (borrowers). A financial intermediary is typically an institution that facilitates the channeling of funds between lenders and borrowers indirectly. 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. Alternatively, they may lend the money directly via the financial markets, 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. Increasingly, international financial institutions provide funding via companies in the financial sector, rather than directly financing projects.

Functions performed by financial intermediaries
Financial intermediaries provide three 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...

References: 1) “The General Theory of Employment, Interest, and Money” by J. M. Keynes, Published in NY City, 1997 by” Prometheus Books”
2) “Finance, Intermediaries, and Economic Development”
by S. L. Engerman ,  P. T. Hoffman ; Cambridge University Press,2003
3) “The role of financial intermediaries in monetary and credit development ” by P. Moutot, D. Gerdesmeier
by National Bureau of Economic Research, 2005
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