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Financial intermediary

A financial intermediary is an institution or individual that serves as a middleman between two or more parties, typically a lender and borrower, 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.

When the money is lent directly via the financial markets, eliminating the financial intermediary, the converse process of financial disintermediation occurs.

Economic function

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Main article: Financial system
See also: Financial services, financial market, Circular flow of income, and Finance § The financial system

Financial intermediaries channel funds from those who have surplus capital to those who require liquid funds to carry out a desired activity.[1][2] In reallocating otherwise uninvested capital to productive enterprises, financial intermediaries,[3] offer the benefits of maturity and risk transformation.[4] Because of information asymmetries in financial markets and associated economies of scale and economies of scope, specialist financial intermediaries enjoy a cost advantage in offering financial services, raising the overall efficiency of the economy whilst allowing for profit generation.[5]

Financial intermediaries may deal in personal finance, such as loans and mortgages;[6] corporate finance, including private equity and venture capital investments; and non-commercial finance such as project finance, climate finance and development finance.[7][8]

Various disadvantages have also been noted in the context of climate finance and development finance institutions.[7] These include a lack of transparency, inadequate attention to social and environmental concerns, and a failure to link directly to proven developmental impacts.[9]

Types of financial intermediaries

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According to the dominant economic view of monetary operations, the following institutions are or can act as financial intermediaries:[10]

 
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 institutions that create money.[10]

See also

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References

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  1. ^ 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.{{cite book}}: CS1 maint: ___location (link)
  2. ^ Global Shadow Banking Monitoring Report 2013 (PDF). Financial Stability Board. 2013. p. 12. ISBN 978-0-07-087158-8.
  3. ^ Infinite Financial Intermediation, 50 Wake Forest Law Review 643 (2015), available at: http://ssrn.com/abstract=2711379
  4. ^ Siklos, Pierre (2001). Money, Banking, and Financial Institutions: Canada in the Global Environment. Toronto: McGraw-Hill Ryerson. p. 35. ISBN 0-07-087158-2.
  5. ^ Gahir, Bruce (2009). "Financial Intermediation". Prague, Czech Republic. {{cite journal}}: Cite journal requires |journal= (help)
  6. ^ Robert E. Wright and Vincenzo Quadrini. Money and Banking: Chapter 2 Section 5: Financial Intermediaries.[1] Accessed June 28, 2012
  7. ^ a b Institute for Policy Studies(2013), "Financial Intermediaries", A Glossary of Climate Finance Terms, IPS, Washington DC
  8. ^ Eurodad (2012), "Investing in financial intermediaries: a way to fill the gaps in public climate finance? Archived 2012-08-29 at the Wayback Machine", Eurodad, Brussels
  9. ^ 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
  10. ^ a b "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" Archived 2015-06-11 at the Wayback Machine, by Zoltan Jakab and Michael Kumhof, Bank of England Working Paper No 529, May 2015

Bibliography

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  • 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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