Editing Financial intermediary

{{Short description|Financial institution that connects surplus and deficit agents}}
{{Financial market participants}}

A '''financial intermediary''' is an institution or individual that serves as a "[[Intermediary|middleman]]" among diverse parties in order to facilitate financial transactions. Common types include [[commercial banks]], [[investment banks]], [[stockbrokers]], insurance and pension funds, pooled investment funds, leasing companies,  and stock exchanges.

The financial intermediary thus facilitates the indirect channeling of [[funding|funds]] between, generically, lenders and borrowers.<ref name="Financial Stability">{{cite book
  | title = Global Shadow Banking Monitoring Report 2013
  | publisher = Financial Stability Board
  | year = 2013
  | page = 12
  | url = http://www.financialstabilityboard.org/publications/r_131114.pdf 
  | isbn = 978-0-07-087158-8}}</ref> 
That is, savers (lenders) give funds to an intermediary institution (such as a [[bank]]), and that institution gives those funds to spenders (borrowers). 
When the money is lent directly - via the [[financial market]]s - eliminating the financial intermediary, this is known as financial [[disintermediation]].

==Economic function==
{{Main|Financial system}}
{{See also|Financial services|financial market|Circular flow of income|Finance#The financial system}}
Financial intermediaries, as outlined, essentially, channel funds from those who have surplus capital ([[saving|savers]]) to those who require liquid funds to carry out a desired activity ([[investment|investors]]).<ref>[http://www.financeinformer.com.au/the-role-of-financial-intermediaries "The Role Of Financial Intermediaries"] {{Webarchive|url=https://archive.today/20150416230828/http://www.financeinformer.com.au/the-role-of-financial-intermediaries |date=2015-04-16 }}, Finance Informer website, Australia (accessed 10 June 2015)</ref> 
<ref>{{cite book
  | last1 = O'Sullivan
  | first1 = Arthur
  | authorlink = Arthur O'Sullivan (economist)
  | first2 = Steven M. | last2 = Sheffrin
  | title = Economics: Principles in Action
  | url = https://archive.org/details/economicsprincip00osul
  | url-access = limited
  | publisher = Pearson Prentice Hall
  | year = 2003
  | location = Upper Saddle River, New Jersey 07458
  | page = [https://archive.org/details/economicsprincip00osul/page/n288 272]
  | isbn = 0-13-063085-3}}</ref>
Financial intermediaries thus ''reallocate'' otherwise uninvested capital to productive enterprises.
<ref>Infinite Financial Intermediation, 50 Wake Forest Law Review 643 (2015), available at:  http://ssrn.com/abstract=2711379</ref><ref name="Siklos2001">{{cite book
  | last = Siklos
  | first = Pierre
  | authorlink = 
  | title = Money, Banking, and Financial Institutions: Canada in the Global Environment
  | publisher = McGraw-Hill Ryerson
  | year = 2001 
  | location = Toronto
  | page = 35
  | url = 
  | doi = 
  | id = 
  | isbn = 0-07-087158-2}}</ref>

In doing so, they  offer the  benefits of maturity and [[risk transformation]]. In other words, through the process of financial intermediation, [[assets]] or [[liability (financial accounting)|liabilities]] may be transformed into assets or liabilities with (very) different risk and payment profiles.<ref name="Siklos2001" />
*In the personal finance context, the instrument in question will be in the form of a [[loan]] or a [[mortgage loan|mortgage]].<ref>Robert E. Wright and Vincenzo Quadrini. Money and Banking: Chapter 2 Section 5: Financial Intermediaries.[http://www.saylor.org/site/wp-content/uploads/2012/06/ECON302-1.2-1st.pdf] Accessed June 28, 2012</ref>
*In the [[corporate finance|corporate context]], the form may be take any variety of debt, [[equity (finance)|equity]], or hybrid stakeholding structures, extending to [[private equity]] and [[venture capital]] investments. 
*Even in the non-commercial context of [[project finance]], [[Climate Finance|climate finance]] and [[Development finance institution|development finance]], financial intermediaries generally will be from the [[private sector]].<ref name="Financial Intermediaries">Institute for Policy Studies(2013), "[http://climatemarkets.org/glossary/financial-intermediaries.html Financial Intermediaries]", A Glossary of Climate Finance Terms, IPS, Washington DC</ref><ref>Eurodad (2012), "[http://eurodad.org/1540077/ Investing in financial intermediaries: a way to fill the gaps in public climate finance?]", Eurodad, Brussels</ref>
<ref>{{cite news |last1=Anton |first1=John |title=Investissement scpi |url=https://comparatif-scpi.fr |access-date=30 July 2022}}</ref>
The prevalence of these intermediaries, relative to disintermediated transactions, is explained in that specialist financial intermediaries ostensibly [[theory of the firm|enjoy a cost advantage]] in offering financial services; this not only enables them to make profit, but also raises the overall efficiency of the economy. Their existence and services are then explained by the [[information asymmetry|"information problems"]] associated with financial markets.<ref>{{Cite journal
 | last=Gahir
 | first=Bruce
 | title=Financial Intermediation
 | place=Prague, Czech Republic
 | year=2009
 }}</ref>

==Functions performed by financial intermediaries==
The hypothesis of financial intermediaries adopted by [[mainstream economics]] offers the following three major functions they are meant to perform:

# [[Creditor]]s provide a line of credit to qualified clients and collect the premiums of debt instruments such as loans for financing homes, education, auto, credit cards, small businesses, and personal needs.
# Risk transformation{{citation needed|date=November 2012}}
# Convenience denomination
# Commercial banks may provide safe storage for both cash as well as precious metals. <ref>{{cite web | url=https://corporatefinanceinstitute.com/resources/economics/financial-intermediary-transactions/ | title=Financial Intermediary }}</ref>

==Advantages and disadvantages of financial intermediaries==

There are two essential advantages from using financial intermediaries:
# Cost advantage over direct lending/borrowing {{Citation needed|reason=no sources given whatsoever|date=January 2011}}
# [[Market failure]] protection; The conflicting needs of lenders and borrowers are reconciled, preventing{{Citation needed|reason=this is a major claim|date=January 2011}} market failure

The '''cost advantages''' of using financial intermediaries include:
#Reconciling conflicting preferences of lenders and borrowers
#Risk aversion intermediaries help spread out and decrease the risks
#[[Economies of scale]] - using financial intermediaries reduces the costs of lending and borrowing 
#[[Economies of scope]] - intermediaries concentrate on the demands of the lenders and borrowers and are able to enhance their products and services (use same inputs to produce different outputs)

Various disadvantages have also been noted in the context of [[Climate Finance|climate finance]] and [[development finance institution]]s.<ref name="Financial Intermediaries"/> These include a lack of transparency, inadequate attention to social and environmental concerns, and a failure to link directly to proven developmental impacts.<ref>Bretton Woods Project (2010)"[http://www.brettonwoodsproject.org/art-567190 Out of sight, out of mind? IFC investment through banks, private equity firms and other financial intermediaries]", Bretton Woods Project, London</ref>

== Types of financial intermediaries ==
According to the dominant economic view of monetary operations,<ref name=boe>"The currently dominant intermediation of [[loanable funds]] (ILF) model views banks as [[barter]] institutions that intermediate deposits of pre-existing, real, [[loanable funds]] between depositors and borrowers. The problem with this view is that, in the real world, there are no pre-existing loanable funds; and ILF-type institutions do not exist. Instead, banks create new funds in the act of lending, through matching loan and deposit entries, both in the name of the same customer, on their [[balance sheet]]s. The financing-through-money-creation (FMC) model reflects this, and therefore views banks as fundamentally '''monetary institutions'''. The FMC model also recognises that, in the real world, there is no [[Money creation#Money multiplier|deposit multiplier]] mechanism." From [http://www.bankofengland.co.uk/research/Documents/workingpapers/2015/wp529.pdf "Banks are not intermediaries of loanable funds — and why this matters"], by [http://michaelkumhof.weebly.com/vitae.html Zoltan Jakab] and [[Michael Kumhof]], [[Bank of England]] Working Paper No 529, May 2015</ref> the following institutions are or can act as financial intermediaries:
* [[Bank]]s
* [[Mutual savings bank]]s
* [[Savings bank]]s
* [[Building society|Building societies]]
* [[Credit union]]s
* [[Financial adviser]]s or [[broker]]s
* [[Insurance]] companies
* [[Collective investment scheme]]s
* [[Pension fund]]s
* Cooperative societies
* Stock exchanges

[[File:Bank of England Mc Leavy et al. (2014) Banks Money Creation Balance Sheets (failed in consistent description).png|thumbnail|right|Money Creation [[Balance Sheet]]s (stylized) by commercial banks (see [[Bank of England]] 2014).]]
According to the alternative view of monetary and banking operations, banks are  not intermediaries but "fundamentally [[money creation]]" institutions,<ref name=boe/> while the other  institutions in the category of supposed "intermediaries" are simply [[investment fund]]s.<ref name=boe/>

==See also==	 	
* [[Debt]]
* [[Financial economics]]
* [[Investment]]
* [[Saving (money)|Saving]]
* [[Financial market efficiency]]
* [[Pass-through security]]

== References ==
{{Reflist}}

== Bibliography ==
*Pilbeam, Keith. Finance and Financial Markets. New York: PALGRAVE MACMILLAN, 2005.
*Valdez, Steven. An Introduction To Global Financial Markets. Macmillan Press, 2007.

{{Authority control}}

[[Category:Financial services organizations]]