Financial intermediary

Definition

Financial intermediaries are entities that facilitate transactions between savers and borrowers, helping to allocate capital efficiently within an economy. Common examples include banks, insurance companies, and investment funds.

5 Must Know Facts For Your Next Test

1. Financial intermediaries reduce transaction costs by pooling resources from many individuals.
2. They help manage risk through diversification and risk-sharing mechanisms.
3. Intermediaries provide liquidity by allowing savers to access their funds more easily.
4. They play a crucial role in the credit creation process by lending out deposited funds.
5. Financial intermediaries enhance information efficiency by conducting due diligence on borrowers.

Review Questions

• What are two primary roles of financial intermediaries?
• How do financial intermediaries reduce transaction costs?
• Why is liquidity an important function provided by financial intermediaries?

Related terms

Commercial Bank: A financial institution that accepts deposits from the public and provides loans for business and personal use.

Investment Fund: A pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, and other assets.

Insurance Company: A company that provides coverage in exchange for premiums, helping individuals and businesses manage risk.