View source for Finance:Financial intermediary

{{Financial market participants}}
A '''financial intermediary''' is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds, and stock exchanges. Financial intermediaries reallocate otherwise uninvested capital to productive enterprises through a variety of debt, equity, or hybrid stakeholding structures.<ref>Infinite Financial Intermediation, 50 Wake Forest Law Review 643 (2015), available at:  http://ssrn.com/abstract=2711379</ref><ref name="Siklos2001">{{cite book
  | last = Siklos
  | first = Pierre
  | title = Money, Banking, and Financial Institutions: Canada in the Global Environment
  | publisher = McGraw-Hill Ryerson
  | year = 2001 
  | location = Toronto
  | page = 35
  | url = 
  | doi = 
  | id = 
  | isbn = 0-07-087158-2}}</ref>

Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities.<ref name="Siklos2001" /> As such, financial intermediaries channel funds from people who have surplus capital ([[Finance:Saving|savers]]) to those who require liquid funds to carry out a desired activity ([[Finance:Investment|investors]]).<ref>{{cite book
  | last = O'Sullivan
  | first = Arthur
  | first2 = Steven M. | last2 = Sheffrin
  | title = Economics: Principles in Action
  | publisher = Pearson Prentice Hall
  | year = 2003
  | location = Upper Saddle River, New Jersey 07458
  | page = 272
  | isbn = 0-13-063085-3}}</ref>

A financial intermediary is typically an institution that facilitates the channeling of [[Finance:Funding|funds]] between lenders and borrowers indirectly.<ref name="Financial Stability">{{cite book
  | title = Global Shadow Banking Monitoring Report 2013
  | publisher = Financial Stability Board
  | year = 2013
  | page = 12
  | url = http://www.financialstabilityboard.org/publications/r_131114.pdf 
  | isbn = 0-07-087158-2}}</ref> That is, savers (lenders) give funds to an intermediary institution (such as a [[Social:Bank|bank]]), and that institution gives those funds to spenders (borrowers). This may be in the form of [[Finance:Loan|loan]]s or [[Finance:Mortgage loan|mortgage]]s.<ref>Robert E. Wright and Vincenzo Quadrini. Money and Banking: Chapter 2 Section 5: Financial Intermediaries.[http://www.saylor.org/site/wp-content/uploads/2012/06/ECON302-1.2-1st.pdf] Accessed June 28, 2012</ref> Alternatively, they may lend the money directly via the [[Finance:Financial market|financial market]]s, and eliminate the financial intermediary, which is known as financial [[Disintermediation|disintermediation]].

In the context of climate finance and [[Finance:Development finance institution|development]], financial intermediaries generally refer to private sector intermediaries, such as banks, private equity, venture capital funds, leasing companies, insurance and pension funds, and micro-credit providers.<ref name="Financial Intermediaries">Institute for Policy Studies(2013), "[http://climatemarkets.org/glossary/financial-intermediaries.html Financial Intermediaries]", A Glossary of Climate Finance Terms, IPS, Washington DC</ref> Increasingly, [[Organization:International financial institutions|international financial institutions]] provide funding via companies in the financial sector, rather than directly financing projects.<ref>Eurodad (2012), "[http://eurodad.org/1540077/ Investing in financial intermediaries: a way to fill the gaps in public climate finance?]", Eurodad, Brussels</ref>

==Functions performed by financial intermediaries==
The hypothesis of financial intermediaries adopted by mainstream economics offers the following three major functions they are meant to perform:

# [[Finance:Creditor|Creditor]]s provide a line of credit to qualified clients and collect the premiums of debt instruments such as loans for financing homes, education, auto, credit cards, small businesses, and personal needs.
#:Converting short-term liabilities to long term assets (banks deal with large number of lenders and borrowers, and reconcile their conflicting needs)
# Risk transformation{{citation needed|date=November 2012}}
#:Converting risky investments into relatively risk-free ones. (lending to multiple borrowers to reduce the risk)
# Convenience denomination
#:Matching small [[Finance:Deposit|deposits]] with large [[Finance:Loan|loan]]s and large deposits with small loans

==Advantages and disadvantages of financial intermediaries==

There are two essential advantages from using financial intermediaries:
# Cost advantage over direct lending/borrowing {{Citation needed|reason=no sources given whatsoever|date=January 2011}}
# Market failure protection; The conflicting needs of lenders and borrowers are reconciled, preventing{{Citation needed|reason=this is a major claim|date=January 2011}} market failure

The '''cost advantages''' of using financial intermediaries include:
#Reconciling conflicting preferences of lenders and borrowers
#Risk aversion intermediaries help spread out and decrease the risks
#[[Finance:Economies of scale|Economies of scale]] - using financial intermediaries reduces the costs of lending and borrowing 
#[[Finance:Economies of scope|Economies of scope]] - intermediaries concentrate on the demands of the lenders and borrowers and are able to enhance their products and services (use same inputs to produce different outputs)

Various disadvantages have also been noted in the context of climate finance and [[Finance:Development finance institution|development finance institution]]s.<ref name="Financial Intermediaries"/> These include a lack of transparency, inadequate attention to social and environmental concerns, and a failure to link directly to proven developmental impacts.<ref>Bretton Woods Project (2010)"[http://www.brettonwoodsproject.org/art-567190 Out of sight, out of mind? IFC investment through banks, private equity firms and other financial intermediaries]", Bretton Woods Project, London</ref>

== Types of financial intermediaries ==
According to the dominant economic view of monetary operations,<ref name=boe>"The currently dominant intermediation of [[Finance:Loanable funds|loanable funds]] (ILF) model views banks as [[Finance:Barter|barter]] institutions that intermediate deposits of pre-existing, real, [[Finance:Loanable funds|loanable funds]] between depositors and borrowers. The problem with this view is that, in the real world, there are no pre-existing loanable funds; and ILF-type institutions do not exist. Instead, banks create new funds in the act of lending, through matching loan and deposit entries, both in the name of the same customer, on their [[Finance:Balance sheet|balance sheet]]s. The financing-through-money-creation (FMC) model reflects this, and therefore views banks as fundamentally '''monetary institutions'''. The FMC model also recognises that, in the real world, there is no [[Finance:Money creation#Money multiplier|deposit multiplier]] mechanism." From [http://www.bankofengland.co.uk/research/Documents/workingpapers/2015/wp529.pdf "Banks are not intermediaries of loanable funds — and why this matters"], by [http://michaelkumhof.weebly.com/vitae.html Zoltan Jakab] and Michael Kumhof, Bank of England Working Paper No 529, May 2015</ref> the following institutions are or can act as financial intermediaries:
* [[Social:Bank|Bank]]s
* [[Finance:Mutual savings bank|Mutual savings bank]]s
* Savings banks
* [[Finance:Building society|Building societies]]
* [[Social:Credit union|Credit union]]s
* [[Finance:Financial adviser|Financial adviser]]s or [[Finance:Broker|broker]]s
* [[Finance:Insurance|Insurance]] companies
* Collective investment schemes
* Pension funds
* cooperative societies
* Stock exchanges

According to the alternative view of monetary and banking operations, banks are  not intermediaries but "fundamentally [[Finance:Money creation|money creation]]" institutions,<ref name=boe/> while the other  institutions in the category of supposed "intermediaries" are simply [[Finance:Investment fund|investment fund]]s.<ref name=boe/>

==Summary==
Financial intermediaries are meant to  bring together those economic agents with surplus funds who want to lend (invest) to those with a shortage of funds who want to borrow.<ref>[http://www.financeinformer.com.au/the-role-of-financial-intermediaries "The Role Of Financial Intermediaries"], Finance Informer website, Australia (accessed 10 June 2015)</ref> In doing this, they  offer the  benefits of maturity and risk transformation. Specialist financial intermediaries are ostensibly enjoying a related (cost) advantage in offering financial services, which not only enables them to make profit, but also raises the overall efficiency of the economy. Their existence and services are explained by the "information problems" associated with financial markets.<ref>{{Cite journal
 | last=Gahir
 | first=Bruce
 | title=Financial Intermediation
 | place=Prague, Czech Republic
 | year=2009
 | postscript=.
 }}</ref>

==See also==	 	
* [[Finance:Debt|Debt]]
* [[Finance:Financial economics|Financial economics]]
* [[Finance:Investment|Investment]]
* Saving
* [[Finance:Financial market efficiency|Financial market efficiency]]

== References ==
{{Reflist}}

== Bibliography ==
*Pilbeam, Keith. Finance and Financial Markets. New York: PALGRAVE MACMILLAN, 2005.
*Valdez, Steven. An Introduction To Global Financial Markets. Macmillan Press, 2007.

[[Category:Financial services]]

{{Sourceattribution|Financial intermediary|1}}