Financial Intermediary

A financial intermediary is an individual, or, more often, a financial institution that mediates between two or more parties in a financial context. Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. The classic example of a financial intermediary is a bank that transforms bank deposits into bank loans. As such, financial intermediaries channel funds from people who have extra money (savers) to those who do not have enough money to carry out a desired activity (borrowers). Typically the first party is a provider of a product or service and the second party is a consumer or customer.
In the U.S., a financial intermediary is typically an institution that facilitates the channelling of funds between lenders and borrowers indirectly. That is, savers (lenders) give funds to an intermediary institution (such as a bank), and that institution gives those funds to spenders (borrowers). This may be in the form of loans or mortgages. Alternatively, they may lend the money directly via the financial markets, which is known as financial disintermediation.
>Functions performed by financial intermediaries:
Financial intermediaries perform five major functions
(1) they facilitate the acquisition of payment for goods and services, e.g. through the use of cheques;
(2) the financial system provides economies of scale and economies of scope that allow an individual to invest in a portfolio of assets, which would be much more difficult in the absence of financial intermediaries;
(3) they ease the liquidity constraint on households and firms which arises when the liquidity available for certain purchases is at variance with the immediate flow of income available; e.g. the use of mortgages allows households to purchase homes today instead of thirty years from now when they have saved up enough money to pay for it;
(4) they allow for the spreading of risk e.g. bank loans spread the costs over all customers in the event of default;
(5) they can reduce the risk of moral hazard and adverse selection created by the information asymmetry that exists between lender and borrower (the lender usually has incomplete information about how the borrower will use the money loaned) because financial intermediaries can develop expertise in things like monitoring borrowers' activities and market conditions.
>Types of financial intermediary:
-Financial intermediaries include:
-Banks
-Building societies
-Credit unions
-Financial advisers or brokers
-Insurance companies
-Collective investment schemes
-Pension funds