CREDIT CRUNCH AND RECESSION

Credit Crunch and Recession

Credit Crunch and Recession

Role of Financial Intermediaries and Credit Crunch

The course of the study will focus of the different functions provided by the financial intermediaries in the allocation of funds between the lenders (savers) and borrowers in the United States of America. The study will also examine the affects of the recent credit crunch on the allocation of funds in the United States of America. The financial intermediaries in the United States of America hold the most critical and prominent function towards the economy. Financial intermediaries play a central role in the allocation and distribution of funds. The financial intermediaries raised funds from different fragmented sources of lenders (saver) and allocated these funds in the borrowers.

The lender of the funds lends these funds to the financial intermediaries with the hope to generate and earn some interest over it (Golikov, 2004). The interest rate offered by the intermediaries is around 10% annually which is revised quarterly. The financial intermediaries charge their service charges and then further lend these funds to the borrower (companies, multinationals, industries). The table below shows the historical interest rate in the United States of America.

Role of Financial Intermediary in Allocation of Funds

A financial intermediary is a financial institution, which indirectly raises money from subjects (lenders) with a capital surplus to provide subjects (borrowers) with capital needs. Households typically have a capital surplus and thus represent the bulk of deposits (savings deposit) financial intermediaries (mostly banks), while firms typically have capital requirements and thus as a borrower occur. Financial intermediaries are therefore demand-and-a mediator between capital supplies (Herbert, 2007). Financial intermediaries stand between economic agents by adjusting the supply of capital at the request of shareholders, that is to say, by draining the financial capacities of certain agents (consisting of an unused savings) to lend or then put to other agents.

However, when it comes to mediation, it is issue more specifically the traditional business of banks that receive deposits on their behalf and lend money on their behalf. This distinguishes them from such activity stockbroker in whom the intermediary is a communication system between a buyer and a seller on an organized market. Thus we speak of disintermediation for financing transactions in which banks do not play a direct counterpart to individuals and businesses seeking capital or suppliers.

One can distinguish between financial intermediaries in the narrower and wider sense. Financial intermediaries in the strict sense mean an institution that receives capital from investors and this passes on to the borrower. A bank accepts deposits and lends money. These intermediaries in the strict sense include the following business models:

Bank

Investment company (including capital investment company )

Venture Capital Funds

Insurance

In the broader sense the financial intermediary can be any entity of individual who can affect and facilitate the trade between the lender san borrowers to permit and facilitate, or to transfer assets to the third party (Murphy, 2009). These include financial brokerage, stock exchange services and rating ...