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3 Cards in this Set
- Front
- Back
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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 |
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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 |
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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by offering a wide range of deposit accounts to a wide range of depositors, so not all of the depositors funds are withdrawn at the same time.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. |
