Intermediation Flashcards
What is a financial intermediary?
The middle man between the person with a surplus and the person with deficit.
What does the financial intermediary do?
They lend money from the person with more liquid funds, at a lower interest rate, and lend it to the person with less liquid funds, charging a higher interest rate. Therefore making a profit between the two rates.
What is disintermediation?
When both individuals from surplus and deficit deal directly with each other rather than through an intermediary
What are the reasons we need intermediaries?
Geographical Location - both surplus and deficit need to locate each other, through an intermediary this becomes easy.
Aggregation - Sometimes lenders might not have the amount of money that the borrower requires. Intermediaries can over overcome this by ‘aggregating’ smaller funds from multiple lenders.
Maturity Transformation - Say for instance the lender could meet the amount required. The lender may not want to lend the money for as long as the borrower needs it… the intermediary can mismatch this by offering a wide range of deposit accounts to a wide range of depositors… making sure that individual depositors money isn’t all withdrawn at the same time.
Risk Transformation - Lenders won’t be willing to lend all of there money to one individual or one company… because of the risk of default payments. Intermediaries can spread this risk by spreading lenders money across multiple borrowers, so if a few fail to repay the others absorb that loss.
