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What is a financial intermediary
An institution that borrows money from the surplus sector of the economy and lends it to the deficit sector
Paying a lower rate of interest to the person with the surplus and charging a higher rate of interest to the person with the deficit.
Banks and building societies are best examples. There profit is the margin between the two interest rates
What is disintermediation?
This is the process where by which lenders and borrowers interact directly rather than through a intermediary.
An example is when companies issue shares to raise funds from the public
What reasons are there why individuals and companies need intermediaries?
Geographical location- lenders and borrowers woukd have to locate each other
Aggregation- even if a borrower could locate a lender. The lender may not have enough to satisfy there needs. Intermediaries overcome this by agggregating small deposits.
Maturity teansformation- the borrower may need the funds for a longer period of time than the lender is prepared to part with. Intermediaries are able to overcome this maturity mismatch by offering a wide range of deposit accounts to a wide range of depositors, so not all of the depositors funds are withdrawn at the same time.
Risk transformation- there is a risk of default or fraud, so intermediaries spread tbis risk over a wide variety of borrowers so that if a few fail to repay the intermediary can absorb the loss.
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