The Role Of A Financial Intermediary


If a financial intermediary is involved in the flow of funds from a lender to a borrower then this would be known as indirect financing. Financial intermediaries transform financial claims in ways that make them more attractive to the ultimate investor. Financial intermediaries include commercial banks, mutual savings banks, credit unions, life insurance companies and pension funds just to name a few and they can partake in the best forex trading. These and other financial intermediaries emerged because of inefficiencies found in direct financing.For direct financing to take place the borrower must be willing to issue a security with a denomination, maturity and other security characteristics that match exactly the desires of the lender. Unless both the lender and borrower are satisfied simultaneously then the transfer of money will probably not take place. For example if Joe with his limited funds cannot purchase a three month commercial paper, which would have a higher yield than his bank CD because the minimum transaction in the commercial paper market is $1 million.To overcome these problems financial intermediaries intervened between the borrower and the ultimate lender. Financial intermediaries purchase direct claims which are basically IOUs with one set of characteristics (terms of maturity, denomination) from borrowers and transform them into indirect claims with a different set of characteristics which they sell to the lender this transformation process is called financial intermediation.Firms that specialize in intermediation are called financial intermediaries or financial institutions. These two terms are interchangeable. The opposite of this would be disintermediation which is the process in reverse. In this scenario lenders take their funds out of the financial institutions and invest their money in direct claims in the direct financial market. Depending on the state of the economy will largely determine role of the financial intermediary and forex trading tips they can provide. In either case the financial intermediaries are vital to any economy whether waning or waxing.

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