Definition
A financial intermediary is an entity such as a commercial bank, savings and loan association, mutual savings bank, credit union, or other institution that facilitates the flow of funds between savings surplus units (individuals and businesses that save) and savings deficit units (individuals and businesses that need credit). Financial intermediaries collect funds from savers and lend them to borrowers, helping to streamline the process of financial intermediation and improve market efficiency.
Examples
Commercial Banks
- Example: JPMorgan Chase, Bank of America
- Role: Accept deposits from individuals and businesses, provide loans and credit, offer investment products.
Savings and Loan Associations
- Example: Washington Mutual (before its collapse in 2008)
- Role: Specialize in accepting savings deposits and providing mortgage and other loans.
Mutual Savings Banks
- Example: Northeast Bank (MA)
- Role: Offer a range of savings products and services, focusing primarily on personal banking and real estate loans.
Credit Unions
- Example: Navy Federal Credit Union, Alliant Credit Union
- Role: Not-for-profit institutions that provide financial services to their members, including savings accounts, loans, and other financial products.
Frequently Asked Questions
What is the main function of a financial intermediary?
The main function of a financial intermediary is to mediate the flow of funds from savers to borrowers, helping to allocate resources efficiently in the economy.
How do financial intermediaries benefit the economy?
Financial intermediaries increase economic efficiency by reducing transaction costs, diversifying risk, and providing liquidity, thus facilitating investment and consumption.
Are financial intermediaries always banks?
No, financial intermediaries can also include non-bank entities such as insurance companies, pension funds, and investment funds that play a similar role in channeling funds.
What distinguishes a credit union from a commercial bank?
Credit unions are not-for-profit institutions owned by their members and typically offer lower fees and better interest rates, whereas commercial banks are for-profit entities and focus on maximizing shareholder value.
Can an individual act as a financial intermediary?
Generally, financial intermediation is conducted by institutions rather than individuals, due to the scale, expertise, and regulatory requirements involved in these activities.
Related Terms
Liquidity
Definition: The ease with which an asset can be converted into cash without affecting its market price.
Risk Diversification
Definition: The practice of spreading investments across various financial assets to reduce exposure to risk.
Transaction Costs
Definition: Expenses incurred when buying or selling goods or services, often reduced by financial intermediaries through economies of scale.
Interest Rate
Definition: The amount charged by lenders to borrowers for the use of assets, usually expressed as a percentage of the principal.
Credit
Definition: An arrangement to receive goods, cash, or services now and pay for them in the future.
Online References
- Investopedia: Financial Intermediary
- Federal Reserve: Financial Intermediaries
- Wikipedia: Financial Intermediary
Suggested Books for Further Studies
- “The Economics of Money, Banking, and Financial Markets” by Frederic S. Mishkin
- “Financial Institutions Management: A Risk Management Approach” by Anthony Saunders and Marcia Millon Cornett
- “Money, Banking, and Financial Markets” by Stephen G. Cecchetti and Kermit L. Schoenholtz
Fundamentals of Financial Intermediary: Finance Basics Quiz
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