A financial intermediary is an entity that facilitates the channeling of funds between parties who have excess capital (savings surplus units) and those who require funds (savings deficit units). Entities such as commercial banks, savings and loan associations, mutual savings banks, credit unions, and other similar organizations perform these intermediary functions to ensure the efficient allocation of resources in the economy.
Types of Financial Intermediaries§
Commercial Banks§
Commercial banks accept deposits from individuals and businesses, provide checking account services, and offer loans. They profit by charging higher interest rates on loans than they pay out on deposits.
Savings and Loan Associations§
Savings and loan associations primarily focus on providing mortgage loans for residential housing. They also accept savings deposits and provide customers with interest on these deposits.
Mutual Savings Banks§
Mutual savings banks are financial institutions owned by depositors. Like savings and loan associations, they specialize in savings accounts and mortgage lending.
Credit Unions§
Credit unions are non-profit organizations that provide financial services to their members. They offer similar services to commercial banks but often at more favorable rates due to their non-profit status.
Functions of Financial Intermediaries§
Risk Management§
Intermediaries reduce risk through diversification, pooling resources from numerous depositors to make a variety of investments.
Liquidity§
They provide liquidity to depositors by allowing them to withdraw their funds on demand while lending the pooled funds to borrowers.
Maturity Transformation§
Financial intermediaries can transform short-term liabilities (deposits) into long-term assets (loans).
Efficiency in Allocation of Funds§
They analyze the creditworthiness of borrowers and allocate funds accordingly, improving overall economic efficiency.
Examples of Financial Intermediaries§
- JPMorgan Chase Bank: A large commercial bank in the USA.
- Navy Federal Credit Union: The largest credit union in the United States.
- Wells Fargo: Another major commercial bank with a wide range of services.
Historical Context and Evolution§
Financial intermediaries have evolved significantly over centuries. Originally, moneylenders and goldsmiths acted as early forms of intermediaries. The banking systems of today stem from these rudimentary practices, growing into sophisticated institutions that play critical roles in modern economies.
Applicability and Impact on the Economy§
Financial intermediaries support economic growth by facilitating investments, enhancing the liquidity of personal and corporate finances, and ensuring efficient distribution of resources. They act as a bridge between savers and borrowers, contributing to the stability and expansion of financial markets.
Comparisons and Related Terms§
Financial Markets§
Unlike financial intermediaries, financial markets are venues where savers and borrowers transact directly through mechanisms like stock exchanges and bond markets.
Direct Finance§
When borrowers directly access funds from savers without intermediary involvement, it’s termed direct finance, contrasting with the indirect finance facilitated by intermediaries.
FAQs§
What is the main function of a financial intermediary?
How do financial intermediaries profit?
Why are financial intermediaries important?
References§
- Miskin, Frederic S., and Stanley G. Eakins. Financial Markets and Institutions. Pearson, 2012.
- Levine, Ross. “Financial Development and Economic Growth: Views and Agenda.” Journal of Economic Literature, vol. 35, no. 2, 1997, pp. 688-726.
Summary§
Financial intermediaries are crucial entities in the financial system, ensuring the smooth flow of funds between surplus and deficit units. Through various types like commercial banks and credit unions, intermediaries enhance economic efficiency by managing risk, providing liquidity, and supporting economic growth. Understanding the role and function of these entities is essential for comprehending broader economic dynamics.
This entry provides a comprehensive and detailed overview of financial intermediaries, encapsulating several critical aspects from definitions to their impact on the economy.
