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Milan Vaishnav
Milan Vaishnav, Financial Advisor
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Why are financial intermediaries very important in financial

Customer Question

Why are financial intermediaries very important in financial statement
Submitted: 7 years ago.
Category: Finance
Expert:  Milan Vaishnav replied 7 years ago.

Dear Friend,

 

Financial intermediaries can be defined as persons or an individual, or, more often, a financial institution that mediates between two or more parties in a financial context.

 

The classic example of a financial intermediary is a bank that transforms bank deposits into bank loans.[2] As such, financial intermediaries channel funds from people who have extra money (savers) to those who do not have enough money to carry out a desired activity (borrowers).[3] Typically the first party is a provider of a product or service and the second party is a consumer or customer.

 

In the U.S., a financial intermediary is typically an institution that facilitates the channelling of funds between lenders and borrowers indirectly. That is, savers (lenders) give funds to an intermediary institution (such as a bank), and that institution gives those funds to spenders (borrowers). This may be in the form of loans or mortgages.

 

The importance of the financial intermediaries is immense in the modern day world.

 

Financial Intermediaries as Markets for Firm's Assets::Financial intermediaries appear to have a key role in the restructuring and liquidation of firms in distress. In particular, there is rich evidence that financial intermediaries play an active role in the reallocation of displaced capital, meant both as the piece-meal reallocation of assets (such as the redeployment of individual plants) and, more broadly, as the sale of entire bankrupt corporations to healthy ones. A key part of reorganization under main bank supervision or management is the implementation of a plan of asset sales with proceeds typically used to recover bank loans.Financial intermediaries arise as internal, centralized markets where information on machines and buyers is readily available, allowing displaced capital to migrate towards its most productive uses. Financial intermediaries can perform this role by aggregating the information on firms collected in the credit market. The function of intermediaries as matchmakers between savers and firms in the credit market can support their function as internal markets for assets.

 

Moreover, over and above this, the financial intermediaries also assume importance in today's world as function for Clearing and settling payments, function for Provision of a mechanism for pooling of funds and subdivision of shares, it allows provision of ways to transfer economic resources, it allows provision of ways to manage uncertainty and control risk, provides price information, etc.

 

Comprehensive resources can be obtained from http://www.indiianmba.com/Occasional_Papers/OP125/op125.html , http://ingrimayne.com/econ/Financial/Intermediaries.html and http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4

 

I hope the above helps...

 

Regards,

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