Financial Intermediaries

Exectuive Summary

Financial intermediaries can be defined as the major instrument in which funds are moved from lenders to borrowers of fund. The role of financial intermediation is to provide efficient financial systems in order to have a healthy economy, and for this to happen there needs to be efficiency. In this paper we will talk about the role of financial intermediaries, wat they can and finaaly we will discussed financial intermediaries role in australian economy.

Table of Contents

Exectuive Summary2

Introduction to the issue4

What are financial intermediaries?4

What do they do?6

Financial intermediaries and the Australian economy: Discussion8

Conclusion13

Financial Intermediaries

Introduction to the issue

Every economy and financial market has its own shortcomings in regards to employment of funds. The prosperity and equilibrium of a financial market is determined by the allocation of surplus. In a huge market, most participants are unaware of others, and therefore it is crucial to have an intermediary system that will reallocate funds from the surplus areas to the places where funds are actually in demand (Allen, 2008).

This gives mobility and liquidity to financial markets. Among all other participants, the role of financial intermediaries is played by the depository and non depository institutions. While the depository institutions borrow money for the surplus possessing individuals and businesses to lend money to others in need, non depository institutions don't take direct borrowings but use other methods to gather funds and lend them to borrowers (Beck, 2006). The function of both kinds of the institution is the same- the mobilize funds and offer liquidity to financial markets.

What are financial intermediaries?

Financial intermediaries can be defined as the major instrument in which funds are moved from lenders to borrowers of fund (Fethi, 2009).It can also be defined as “ an organization that raises money from investors and provides financing for individuals, companies and other organizations” (Brealey, 2007). That is too say that financial intermediation facilitates financing in all aspects of lending, borrowing and investments. It could be said to be the channeling of funds from savers to investors or the movement of funds from people who need funds to people who have excess funds; it is an important part of an economy and is mainly handled by financial institutions and financial markets (Aggarwal & Goodell, 2009).

In addition, the financial intermediation is the entity which in a med position between two parties and manage the financial transaction between them. Commercial banks, investment banks, stock investing services, insurance providers, etc are examples of the financial intermediation. For example banks, it does the important role. Banks obtain funds from depositors and then lend those funds to borrowers.

Also individual as lender can get fixed income at cheaper cost. Also, when the lender uses the financial intermediary he won't need to bear those costs. He does not have to spend money and time for collecting information to find good borrower. Moreover, he can get his money back at any time he want it. Also he does not have to bear risks of default the borrower and other risks because the risks ...