Intermediation- A financial intermediary is an article that serves as the middleman between two parties in a financial transaction, such as a commercial bank, investment bank, mutual fund, or pension fund. Financial intermediaries offer a number of compensations to the common consumer, including liquidity, safety, and economies of scale required in banking and asset administration. Although in certain areas, such as investing, approaches in technology approach to eliminate the financial intermediary, disintermediation is much less of a warning in other areas of banking, including banking and insurance.
It involves “matching” of lenders with savings to borrowers who need money by an agent or third party, such as a bank. If this matching is successful, the lender obtains a positive rate of return, the borrower receives a return for risk-taking and entrepreneurship and the banker receives a return for making the successful match. If the borrower’s speculative play with the depositor’s funds does not pay off, the depositor can lose the savings borrowed by the borrower and the bank can face significant losses on its loan portfolio.
Commercial banks play certain roles as financial intermediaries. First, they repackage the deposits accepted from investors into loans that are given to firms. In this way, small deposits by original investors can be combined and directed in the form of large loans to firms. Individual investors would have responsibility for achieving this by themselves because they do not have adequate information about the firms that need funds.
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