Financial intermediation

Financial intermediation
Financial intermediation is a productive activity in which an institutional unit incurs obligations on its own account for the purpose of acquiring financial assets by engaging in market financial transactions; The role of financial intermediaries is to transfer money from lenders to borrowers by mediating between them.
What is a financial intermediary?
A financial intermediary is an entity that acts as an intermediary between two parties to a financial transaction, such as a commercial bank, investment bank, mutual fund, or pension fund. Financial intermediaries offer a number of benefits to the average consumer, including safety, liquidity, and economies of scale involved in banking and asset management. Although technological advances in certain areas, such as investment, threaten to eliminate the financial middleman, lack of intermediation poses a much smaller threat in other areas of finance, including banking and insurance.
The main points
Financial intermediaries act as intermediaries for financial transactions, generally between banks or funds.
These intermediaries help create efficient markets and lower the cost of doing business.
Brokers can offer leasing or factoring services, but they do not accept deposits from the public.
Financial intermediaries offer the benefit of pooling risk, reducing cost, and providing economies of scale, among others.

How does a financial broker work?
The non-bank financial intermediary does not accept deposits from the general public. The broker may provide factoring, leasing, insurance or other financial services. Many brokers participate in stock exchanges and use long-term plans to manage and grow their money. The general economic stability of a country can be demonstrated by the activities of financial intermediaries and the growth of the financial services industry.

Financial intermediaries transfer funds from parties with surplus capital to parties in need of funds. The process creates efficient markets and reduces the cost of doing business. For example, a financial advisor communicates with clients by purchasing insurance, stocks, bonds, real estate and other assets.

Banks connect borrowers and lenders by providing capital from other financial institutions and from the Federal Reserve. Insurance companies collect premiums for insurance policies and provide policy benefits. A pension fund raises funds on behalf of members and distributes payments to pensioners.
Types of financial intermediaries
Mutual funds provide active management of the capital pooled by shareholders. The fund manager communicates with shareholders by buying shares in companies that are expected to outperform the market. By doing so, the manager provides to the shareholders the assets, companies with capital and the market with liquidity.
Advantages of financial intermediaries
Through a financial intermediary, savers can pool their money, enabling them to make large investments, which in turn benefit the entity in which they invest. At the same time, financial intermediaries accumulate risk by distributing funds across a variety of investments and loans. Loans benefit families and countries by enabling them to spend more money than they currently have.

Financial intermediaries also offer the advantage of reducing costs on several fronts. For example, they have access to economies of scale to expertly assess the credit standing of potential borrowers and maintain records and profiles cost effectively. Finally, it reduces the costs of many of the financial transactions that the individual investor would have had to make if the financial intermediary was not present.
Example of a financial broker
In July 2016, the European Commission adopted two new financial instruments for European Structural Fund Investments (ESI). The goal was to facilitate access to finance for start-ups and promoters of urban development projects.1 Loans, equity, guarantees, and other financial instruments attract larger public and private sources of funding that can be reinvested over many cycles than receiving grants.

One of the tools, a co-investment facility, was to provide funding to startups to develop their business models and attract additional financial support through a pooled investment scheme managed by a single major financial intermediary. The European Commission has projected that the total investment of public and private resources will be around 15 million euros (about $17.75 million) for each SME.

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