What Are Financial Intermediaries?
Financial intermediaries function as go-betweens in the financial system between savers and borrowers. They serve an essential role in the economy by facilitating the transfer of funds from people with excess cash (savers) to those needing funds (borrowers) to invest in initiatives or make purchases.
Definition 2
Financial intermediaries are the institutions (such as banks, insurance companies, mutual funds, pension funds, and finance companies) that borrow funds from people who have saved and then make loans to others.
More Thorough Understanding of the Term
Financial intermediaries' principal job is to gather funds from savers and channel them into loans, investments, or other financial instruments borrowers desire. This is known as intermediation, and it allows savers to receive a return on their funds while also providing funding to borrowers in need.
Banks and credit unions are two of the most well-known financial intermediaries, as they accept deposits from savers and lend to borrowers. These loans range from mortgages and vehicle loans to company loans and credit lines. Other services banks and credit unions offer include checking accounts, savings accounts, and credit cards.
Other standard financial intermediaries include insurance companies, investment companies, pension funds, etc.
They operate as bridge builders between these two groups, connecting them through various financial instruments. Here are some of the most essential roles of financial intermediaries and how they operate:
- They collect funds from savers in the form of deposits, saving accounts.
- They lend the collected fund to borrowers such as individuals, businesses, and governments. They also invest in other financial instruments, such as stocks and bonds, to earn a return on the funds collected from savers.
- Financial intermediaries provide liquidity to depositors by making it easier for them to access their funds, such as through checking accounts and ATMs. They also assist borrowers with liquidity by providing loans and other financial products that allow them to access funds quickly and easily.
- Financial intermediaries manage risk by diversifying their investment portfolio, offering loans to creditworthy clients, and employing other risk management techniques. This allows businesses to limit losses and protect savers' assets.
- Financial intermediaries provide savers and borrowers with financial advice and counseling, allowing them to make more informed decisions regarding their financial future. They provide financial planning, investment consulting, and retirement planning services.
Examples
Example 1
Fidelity Investments is a financial intermediary that offers mutual funds, exchange-traded funds (ETFs), and retirement accounts.
Example 2
JPMorgan Chase & Co. is one of the world's largest financial intermediaries, providing various financial services, including banking, investment management, and asset management.
In Sentences
- Financial intermediaries are essential players in the financial system because they facilitate funds transfer from savers to borrowers.
- They act as intermediaries between savers and borrowers, helping to connect them through various financial instruments.