Financial Intermediaries

Question 1

What is a financial intermediary?

Answer 1

An institution
That holds funds from lenders
In order to make loans to borrowers

E.g. Bank, building society, credit union, unit trust company

Question 2

What do FIs do?

Answer 2

Channel funds indirectly between lenders and borrowers

Lenders (savers) have extra money or surplus savings, and borrowers don’t have enough money to carry out a desired activity

Fundamentally: Money creation

Question 3

Why do people use FIs?

Answer 3

Expertise
Access to systems
Confidence
Reduces risk
Obtain return on asset

Question 4

What do FIs acquire…

Answer 4

Primary claims in deficit units

And

Secondary claims to finance such acquisitions

Process: asset or maturity transformation - BANKS BORROW SHORT AND LEND LONG

Question 5

FIs can take…

Answer 5

Everyone’s savings and aggregate them into a large POOL from which large borrowings or investments can be made

Question 6

What are the 3 main functions of an FI?

Answer 6

1. Converting short term liabilities to long term assets (e.g. For homes, education, automobiles, credit cards etc)
2. Risk transformation (risky to less risky, diversification)
3. Convenience domination (matching small deposits with large loans and large deposits with small loans)

Question 7

What are the advantages of FIs?

Answer 7

COSTS

Reconciling conflicting preferences

Risk aversion - spread out and decrease

Economies of scale -reduces costs of lending and borrowing

Economies of scope - demands of Ls and bs and enhance products and services

Enabling people to spend more than their income

Promoting higher rate of economic growth

Question 8

Disadvantages of FIs

Answer 8

Lack of transparency

Inadequate attention to social and environmental concerns

Failure to link directly to proven developmental impacts