Financial services - an introduction

Question 1

Why do we need financial institutions?

Answer 1

Financial institutions bring together borrowers and savers and satisfy a ‘double coincidence of wants’.

Question 2

What is meant by a ‘double coincidence of wants’?

Answer 2

A person may need A and want to sell B and it is unlikely that they will meet someone who needs B and wants to sell A. (a double coincidence of want)

Question 3

How do financial institutions satisfy a double coincidence of wants?

Answer 3

It is unlikely you would find someone to lend you £5000 for the period of time you needed the money. Financial institutions amass surplus finds from savers, all of whom will have different requirements regarding risk, durations etc and then lend the amassed sum to borrowers. In this way they can satisfy both parties.

Question 4

In financial services jargon what is meant by surplus units and deficit units?

Answer 4

savers and borrowers