Financial intermediation consists of “channeling funds between surplus and deficit agents”. A financial intermediary is a financial institution that connects surplus and deficit agents. The classic example of a financial intermediary is a bank that consolidates bank deposits and uses the funds to transform them into bank loans.
Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. As such, financial intermediaries channel funds from people who have extra money or surplus savings (savers) to those who do not have enough money to carry out a desired activity (borrowers).
Against this background, clearly discuss how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk averse intermediaries help spread out and decrease risks
Name:Aroh oluchukwu perpetua
Reg no:2018/243120
Course:Eco 324(financial intermediation)
Department:Economics
discuss how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers
1)By pooling the resources of small savers: banks for example, pool many deposits and use these to make large items. Insurance companies collect and invest many small premiums in order to pay fewer large claims. Mutual funds accept small investment amounts and pool them to buy large stock and bond portfolios.
2)By providing safekeeping, accounting, and payment mechanisms for resources: Banks are obvious example for the safekeeping of money in accounts, keep records of payments, deposits and withdrawals and the use of debit / ATM cards and cheques as payment mechanisms.
3)By providing liquidity: Financial intermediaries can easily and cheaply convert an asset to payment. They make it easy to transform various assets into a means of payment through ATMs, cheques, debit cards etc.
4)Diversifying risk: Financial intermediaries assist investors diversify in ways they would be unable to do on their own. Banks for instance spread depositors’ funds over many types of loans, so that the default of any one loan does not put depositors’ funds in jeopardy.
Then How risk averse intermediaries help spread out and decrease risks
Financial intermediaries provide access to capital.
Banks convert short-term liabilities ( demand deposits ) into long-term assets by providing loans; thereby transforming maturities.
Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles.
Banks provide a safe and accessible environment for individuals and economic entities to deposit excess funds Additionally, banks also provide a service by packaging deposits into loans that are made available to economic agents (individuals and entities) in need of funds.
NAME: ANYANWU COLETTE CHINAZAEKPERE
REG. NO: 2018/242442
COURSE: ECO 324
EMAIL: colettechinazaekpere@gmail.com
DEPARTMENT: ECONOMICS (MAJOR)
How financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk averse intermediaries help spread out and decrease risks.
ANSWER
How financial intermediaries help in reconciling conflicting preferences of lenders and borrowers.
The reason for the all-pervasive nature of the financial intermediaries like banks and insurance companies lies in their uniqueness.
Financial intermediaries have a key role to play in the world economy today. They are the “lubricants” that keep the economy going.
Due to the increased complexity of financial transactions, it becomes imperative for the financial intermediaries to keep re-inventing themselves and cater to the diverse portfolios and needs of the investors.
The financial intermediaries have a significant responsibility towards the borrowers as well as the lenders.
The very term intermediary would suggest that these institutions are pivotal to the working of the economy and they along with the monetary authorities have to ensure that credit reaches to the needy without jeopardizing the interests of the investors. This is one of the main challenges before them.
Financial intermediaries have a central role to play in a market economy where efficient allocation of resources is the responsibility of the market mechanism.
In these days of increased complexity of the financial system, banks and other financial intermediaries have to come up with new and innovative products and services to cater to the diverse needs of the borrowers and lenders. It is the right mix of financial products along with the need for reducing systemic risk that determines the efficacy of a financial intermediary.
Financial intermediaries reallocate otherwise uninvested capital to productive enterprises through a variety of debt, equity, or hybrid stakeholding structures.
Financial intermediaries offer a number of benefits to the average consumer, including safety, liquidity, and economies of scale involved in banking and asset management.
Financial intermediaries offer the benefit of pooling risk, reducing cost, and providing economies of scale, among others.
When using a financial intermediary one tends to have lower search costs as they don’t have to find the right lenders, you leave that to a specialist.
Banks connect borrowers and lenders by providing capital from other financial institutions and from the Federal Reserve.
Insurance companies collect premiums for policies and provide policy benefits. A pension fund collects funds on behalf of members and distributes payments to pensioners.
As outlined above, Banks often serve as the “intermediaries” between those who have the resources and those who want resources.
Financial intermediaries like banks are asset based or fee based on the kind of service they provide along with the nature of the clientele they handle. Asset based financial intermediaries are institutions like banks and insurance companies whereas fee based financial intermediaries provide portfolio management and syndication services.
Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss.
Economies of scale:
Using financial intermediaries reduces the costs of lending and borrowing. A bank can become efficient in collecting deposits, and lending.
This enables economies of scale – lower average costs.
If you had to seek out your own saving, you might have to spend a lot of time and effort to investigate best ways to save and borrow.
Economies of scope:
Intermediaries concentrate on the demands of the lenders and borrowers and are able to enhance their products and services (use same inputs to producedifferent outputs).
Convenience of Amounts :
The bank can lend you the aggregate deposits from the bank and save you finding someone with the exact right sum.
If you want to borrow #100, 000 – it would be difficult to find someone who wanted to lend exactly #100, 000.
But, a bank may have 1,000 people depositing #100 each.
By accepting many small deposits, banks empower themselves to make large loans.
How risk averse intermediaries help spread out and decrease risks.
The purpose of insurance is to share the loss resulting from a certain risk among multiple people exposed to it and agree to insure themselves against it. The most critical role of insurance is to disperse risk across a group of people insured against it, share the loss of each member of society based on the likelihood of loss to their risk, and protect the insured from losses.
Insurance is a legal agreement between an insurance firm (insurer) and an individual (insured). In this case, the insurance company guarantees to compensate the insured for any losses incurred due to the covered contingency occurring.
The contingency is the occurrence that results in a loss. It might be the policyholder’s death or the property being damaged or destroyed.
It’s referred to as a contingency because the outcome of the occurrence is unclear.
In exchange for the insurer’s promise, the insured pays a premium.
You pay premiums to the insurer regularly (which can be set up as an EMI for automatic deduction from your bank account), and they pay you back as an assured amount if something goes wrong.
There are various types of Insurance such as Health Insurance, Life Insurance, Vehicle Insurance, etc.
The primary functions of Insurance are:
Protection and safety
The key function of insurance is to safeguard against the possibility of loss. The time and amount of loss are unpredictable, and if a risk occurs, the person will incur a loss if they do not have insurance. Insurance ensures that a loss will be paid and thereby protects the insured from suffering. Insurance cannot prevent a risk from occurring, but it can compensate for losses resulting from the risk.
Provide safety and security
Insurance provides financial support and decreases the risks that come with doing business and living. It ensures safety and security in the event of a specific incident. The basic function of insurance is to safeguard against future hazards, accidents, and vulnerabilities in this way. No insurance can prevent a risk from existing or prevent future catastrophes, but it can undoubtedly assist you by providing coverage for the hazard’s misfortune.
Collective Risks
People purchase insurance policies to protect themselves from tragedy. Regardless, not every one of them is subjected to bad luck regularly. Only a few people contribute to insurance. Each member of the general public who receives protection pays an annual premium to the reserve. People who are victims of hazards are compensated according to the insurance policy conditions, which helps them meet their financial demands during a challenging period.
Risk Assessment
Insurance companies assess the level of risk by looking at the numerous factors that contribute to a chance. The procedure of determining premium rates is also based on the policy’s risks.
Name: Ukachukwu Divine Amarachi
Reg number: 2018/242426
Department: Economics
Ways By Which The Financial Intermediaries Reconcile Conflicting Preferences Between Lenders and Borrowers;
According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. … This implies that financial intermediaries are middle participants in the exchange of financial assets. Therefore they reconcile preferences by;
Pooling the resources of small savers: banks for example, pool many deposits and use these to make large items. Insurance companies collect and invest many small premiums in order to pay fewer large claims.
Providing safekeeping, accounting, and payment mechanisms for resources: Banks are obvious example for the safekeeping of money in accounts, keep records of payments, deposits and withdrawals and the use of debit / ATM cards and cheques as payment mechanisms.
Diversifying risk: Financial intermediaries assist investors in diversify ways they would be unable to do on their own. Banks for instance spread depositors’ funds over many types of loans, so that the default of any one loan does not put depositors’ funds in jeopardy.
Collecting and processing information: Financial intermediaries are experts at collecting and processing information in order to accurately gauge the risks of various investments and to price them accordingly. The need to collect and process information comes from a fundamental asymmetric information problem inherent in financial markets.
Risk averse intermediaries helps to spread and reduce risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
Additionally, through diversified lending practices, banks are able to lend monies to high-risk entities and by pooling with low-risk loans are able to gain in yield while implementing risk management.
Financial intermediaries helps un reconciling conflict amongst lenders and borrowers through the following ways:
1.Pooling the resources of small savers: banks for example, pool many deposits and use these to make large items. Insurance companies collect and invest many small premiums in order to pay fewer large claims. Mutual funds accept small investment amounts and pool them to buy large stock and bond portfolios.
2.Providing safekeeping, accounting, and payment mechanisms for resources: Banks are obvious example for the safekeeping of money in accounts, keep records of payments, deposits and withdrawals and the use of debit / ATM cards and cheques as payment mechanisms.
3.Providing safekeeping, accounting, and payment mechanisms for resources: Banks are obvious example for the safekeeping of money in accounts, keep records of payments, deposits and withdrawals and the use of debit / ATM cards and cheques as payment mechanisms.
4.Diversifying risk: Financial intermediaries assist investors diversify in ways they would be unable to do on their own. Banks for instance spread depositors’ funds over many types of loans, so that the default of any one loan does not put depositors’ funds in jeopardy.
5.Collecting and processing information: Financial intermediaries are experts at collecting and processing information in order to accurately gauge the risks of various investments and to price them accordingly. The need to collect and process information comes from a fundamental asymmetric information problem inherent in financial markets.
B. Through the diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.Additionally, through diversified lending practices, banks are able to lend monies to high-risk entities and by pooling with low-risk loans are able to gain in yield while implementing risk management.
Obeta Princess Oluchi
2018/242409
Economics Department
Financial intermediaries help reconcile conflicting preferences of lenders and borrowers through direct transfer. It refers to a transfer of assets from one type of tax-deferred retirement plan or account to borrower. Direct transfers are not considered to be distributions and not taxable as income or subject to any penalties for early distribution. Most transfers take several days to complete, although this process is now generally faster in the electronic than in the past. It occurs when firms direct sell their stock or bond to saver without going through any financial institution
The advantages of direct transfer are direct transfers are easy and simple to trade between borrowers and lenders.The reason is when both borrower and lenders agree with the term and condition, the transaction will be in process. Besides, it will be save time and cost. The reason is the transaction can complete online, just taking few days to complete and there is no high commission to pay for intermediate.
Another way is through Indirect Transfer through Investment Bankers
Investment banks refers to a financial institution that helps individuals and corporations to raising their capital by underwriting. They also act as the client’s agent when issuance of securities such as stock and bond. An investment bank may also help organization involved in mergers and acquisitions and provides ancillary services. In investment banking there are two main which are trading securities for cash or other securities and promotion of the securities.
Risk averse intermediaries help spread out and reduce risks by channeling loan risk, financial intermediaries are able to avert risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of various maturities.
NAME: UKAEJIOFO KENECHUKWU VICTOR
DEPT: ECONOMICS
REG NO: 2018/250521
COURSE TITLE: THE FINANCIAL SYSTEM
COURSE CODE: ECO 324
ANSWERS:
Financial intermediaries, all over the world play crucial roles in the development and growth of the economy. An economy is made up of fund raisers and fund suppliers. Financial intermediaries are those institutions in the financial market that mediate between the fund raisers and the fund suppliers. They carry out intermediation between surplus and deficit units of the economy.
Role of Financial Intermediaries
Fund suppliers cannot loan money directly to fund raisers, nor can fund raisers borrow money directly from fund suppliers. These transactions had to be done conveniently through financial intermediaries. They facilitate the exchange of funds between fund surplus units and fund deficit units. According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. Financial intermediaries, through financial intermediation, allow funds to be channeled from those that might not put them to use to those that would put them to productive use. The general name for the services supplied by financial intermediaries is financial intermediation. This implies that financial intermediaries are middle participants in the exchange of financial assets.
There are various types of financial intermediaries. These consist of depository intermediaries, contractual intermediaries, and Investment intermediaries. Depository intermediaries consist of commercial banks, thrifts, mutual savings banks, savings and loan associations, and credit union. Investment intermediaries are made up of investment companies and finance companies. They specialize in both money and capital market funds, which include treasury bills, commercial bank certificates of deposit, long term loans (debentures), and stocks. Contractual intermediaries consist of insurance companies and pension funds. They create instruments that form a contractual relationship with the buyer. These instruments consist of insurance plan, savings, annuity, pension, and loan privileges.
Gershenkron (1962) stated that banks are the largest financial intermediaries that effectively finance industrial expansion in developing countries. Banks are the largest financial intermediaries in the Nigerian economy. According to Schumpeter (1911) bank financial intermediation does not only entail creation of a pool of investible funds, it also involves allocating funds effectively.
Financial intermediaries helps in reconciling conflicting preferences of lenders and borrowers by performing the following functions:
– Pooling the resources of small savers: banks for example, pool many deposits and use these to make large items. Insurance companies collect and invest many small premiums in order to pay fewer large claims. Mutual funds accept small investment amounts and pool them to buy large stock and bond portfolios.
– Providing safekeeping, accounting, and payment mechanisms for resources: Banks are obvious example for the safekeeping of money in accounts, keep records of payments, deposits and withdrawals and the use of debit / ATM cards and cheques as payment mechanisms.
– Providing liquidity: Financial intermediaries can easily and cheaply convert an asset to payment. They make it easy to transform various assets into a means of payment through ATMs, cheques, debit cards etc.
– Diversifying risk: Financial intermediaries assist investors diversify in ways they would be unable to do on their own. Banks for instance spread depositors’ funds over many types of loans, so that the default of any one loan does not put depositors’ funds in jeopardy.
– Collecting and processing information: Financial intermediaries are experts at collecting and processing information in order to accurately gauge the risks of various investments and to price them accordingly. The need to collect and process information comes from a fundamental asymmetric information problem inherent in financial markets.
Name: Aneke Hannah
Reg No: 2018/242453
Dept: Economics
Question
Against this background, clearly discuss how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk averse intermediaries help spread out and decrease risks.
Answer
Financial intermediaries serve as middlemen for financial transactions, generally between banks or funds.These intermediaries help create efficient markets and lower the cost of doing business.
Financial intermediaries, all over the world play crucial roles in the development and growth of the economy. An economy is made up of fund raisers and fund suppliers. Financial intermediaries are those institutions in the financial market that mediate between the fund raisers and the fund suppliers. They carry out intermediation between surplus and deficit units of the economy. Fund suppliers cannot loan money directly to fund raisers, nor can fund raisers borrow money directly from fund suppliers. These transactions had to be done conveniently through financial intermediaries. They facilitate the exchange of funds between fund surplus units and fund deficit units.
There are various types of financial intermediaries. These consist of depository intermediaries, contractual intermediaries, and Investment intermediaries. Depository intermediaries consist of commercial banks, thrifts, mutual savings banks, savings and loan associations, and credit union. Investment intermediaries are made up of investment companies and finance companies. They specialize in both money and capital market funds, which include treasury bills, commercial bank certificates of deposit, long term loans (debentures), and stocks. Contractual intermediaries consist of insurance companies and pension funds. They create instruments that form a contractual relationship with the buyer. These instruments consist of insurance plan, savings, annuity, pension, and loan privileges.
Roles of Financial intermediaries includes;
1)Providing safekeeping, accounting, and payment mechanisms for resources: Banks are obvious example for the safekeeping of money in accounts, keep records of payments, deposits and withdrawals and the use of debit / ATM cards and cheques as payment mechanisms.
2)Providing liquidity: Financial intermediaries can easily and cheaply convert an asset to payment. They make it easy to transform various assets into a means of payment through ATMs, cheques, debit cards etc.
3)Diversifying risk: Financial intermediaries assist investors diversify in ways they would be unable to do on their own. Banks for instance spread depositors’ funds over many types of loans, so that the default of any one loan does not put depositors’ funds in jeopardy.
4)Collecting and processing information: Financial intermediaries are experts at collecting and processing information in order to accurately gauge the risks of various investments and to price them accordingly. The need to collect and process information comes from a fundamental asymmetric information problem inherent in financial markets.
5) Pooling the resources of small savers: banks for example, pool many deposits and use these to make large items. Insurance companies collect and invest many small premiums in order to pay fewer large claims. Mutual funds accept small investment amounts and pool them to buy large stock and bond portfolios.
How risk averse intermediaries help spread out and decrease risks.
Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
Risk aversion intermediaries help spread out and decrease the risks. … Economies of scope – intermediaries concentrate on the demands of the lenders and borrowers and are able to enhance their products and services (use same inputs to produce different outputs).
NAME: UNADIKE FABIAN CHIMEMEZU
REG NO: 2018/249698
DEPARTMENT: ECONOMICS
COURSE TITLE: FINANCIAL SYSTEM
COURSE CODE: ECO 324
QUESTION:
Financial intermediation consists of “channeling funds between surplus and deficit agents”. A financial intermediary is a financial institution that connects surplus and deficit agents. The classic example of a financial intermediary is a bank that consolidates bank deposits and uses the funds to transform them into bank loans.
Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. As such, financial intermediaries channel funds from people who have extra money or surplus savings (savers) to those who do not have enough money to carry out a desired activity (borrowers).
Against this background, clearly discuss how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk averse intermediaries help spread out and decrease risks
ANSWER:
A financial intermediary is a financial institution such as bank, building society, insurance company, investment bank or pension fund.
A financial intermediary offers a service to help an individual/ firm to save or borrow money. A financial intermediary helps to facilitate the different needs of lenders and borrowers.
Financial intermediaries, all over the world play crucial roles in the development and growth of the economy. An economy is made up of fund raisers and fund suppliers. Financial intermediaries are those institutions in the financial market that mediate between the fund raisers and the fund suppliers. They carry out intermediation between surplus and deficit units of the economy.
Role of Financial Intermediaries
Fund suppliers cannot loan money directly to fund raisers, nor can fund raisers borrow money directly from fund suppliers. These transactions had to be done conveniently through financial intermediaries. They facilitate the exchange of funds between fund surplus units and fund deficit units. According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. Financial intermediaries, through financial intermediation, allow funds to be channeled from those that might not put them to use to those that would put them to productive use. The general name for the services supplied by financial intermediaries is financial intermediation. This implies that financial intermediaries are middle participants in the exchange of financial assets.
There are various types of financial intermediaries. These consist of depository intermediaries, contractual intermediaries, and Investment intermediaries. Depository intermediaries consist of commercial banks, thrifts, mutual savings banks, savings and loan associations, and credit union. Investment intermediaries are made up of investment companies and finance companies. They specialize in both money and capital market funds, which include treasury bills, commercial bank certificates of deposit, long term loans (debentures), and stocks. Contractual intermediaries consist of insurance companies and pension funds. They create instruments that form a contractual relationship with the buyer. These instruments consist of insurance plan, savings, annuity, pension, and loan privileges.
Gershenkron (1962) stated that banks are the largest financial intermediaries that effectively finance industrial expansion in developing countries. Banks are the largest financial intermediaries in the Nigerian economy. According to Schumpeter (1911) bank financial intermediation does not only entail creation of a pool of investible funds, it also involves allocating funds effectively.
Financial intermediaries helps in reconciling conflicting preferences of lenders and borrowers by performing the following functions:
– Pooling the resources of small savers: banks for example, pool many deposits and use these to make large items. Insurance companies collect and invest many small premiums in order to pay fewer large claims. Mutual funds accept small investment amounts and pool them to buy large stock and bond portfolios.
– Providing safekeeping, accounting, and payment mechanisms for resources: Banks are obvious example for the safekeeping of money in accounts, keep records of payments, deposits and withdrawals and the use of debit / ATM cards and cheques as payment mechanisms.
– Providing liquidity: Financial intermediaries can easily and cheaply convert an asset to payment. They make it easy to transform various assets into a means of payment through ATMs, cheques, debit cards etc.
– Diversifying risk: Financial intermediaries assist investors diversify in ways they would be unable to do on their own. Banks for instance spread depositors’ funds over many types of loans, so that the default of any one loan does not put depositors’ funds in jeopardy.
– Collecting and processing information: Financial intermediaries are experts at collecting and processing information in order to accurately gauge the risks of various investments and to price them accordingly. The need to collect and process information comes from a fundamental asymmetric information problem inherent in financial markets.
NAME: MBASO RALUCHI
REG NO: 2018/242437
DEPARTMENT: ECONOMICS
A financial intermediary is an entity that acts as the middleman between two parties in a financial transaction, such as a commercial bank, investment bank, mutual fund, or pension fund. Financial intermediaries offer a number of benefits to the average consumer, including safety, liquidity, and economies of scale involved in banking and asset management. It is simply a channel of funds, a link between two parties of a financial transaction.
Financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. Financial intermediaries, through financial intermediation, allow funds to be channeled from those that might not put them to use to those that would put them to productive use. The general name for the services supplied by financial intermediaries is financial intermediation. This implies that financial intermediaries are middle participants in the exchange of financial assets.
There are various types of financial intermediaries. These consist of depository intermediaries, contractual intermediaries, and Investment intermediaries. Depository intermediaries consist of commercial banks, thrifts, mutual savings banks, savings and loan associations, and credit union. Investment intermediaries are made up of investment companies and finance companies. They specialize in both money and capital market funds, which include treasury bills, commercial bank certificates of deposit, long term loans (debentures), and stocks. Contractual intermediaries consist of insurance companies and pension funds. They create instruments that form a contractual relationship with the buyer. These instruments consist of insurance plan, savings, annuity, pension, and loan privileges. Banks provide well-known financial services to invest and borrow funds seamlessly. They have vaults yo keep money safe. Depositors invest funds at an interest rate lower than the borrowing rate. The bank earns its income on the difference between these rates.
A non-banking finance company (NBFC) also provides loans, but at a much higher rate as compared to banks. Mutual fund companies collate various funds and provide investment options to investors on the basis of their budget and risk appetite. These funds consist of shares, bonds, and other investment options. Stock exchanges facilitate the trading of stocks and other trading activities. A commission or brokerage is charged on each transaction done through mutual fund companies and stock exchanges. In the case of credit unions and building societies, these entities are formed to provide financial assistance to its members. Insurance companies provide insurance options to individuals and companies against risk and uncertainty, such as death, health, fire, business loss, etc. Investment banks assist mergers and acquisitions, IPOs, and provide other such services.
NAME : ONYEZOR JESSICA NGOZICHUKWU
REG NO: 2018/249716
DEPARTMENT: ECONOMICS
Financial intermediaries make a profit from the difference from what they earn on their assets and what they pay in liabilities. Financial intermediaries helps in reconciling conflicting preferences of lenders and borrowers by performing the following functions:
– POOLING THE RESOURCES OF SMALL SAVERS: Banks for example, pool many deposits and use these to make large items. Insurance companies collect and invest many small premiums in order to pay fewer large claims. Mutual funds accept small investment amounts and pool them to buy large stock and bond portfolios.
– PROVIDING SAFEKEEPING, ACCOUNTING, AND PAYMENT MECHANISMS FOR RESOURCES: Banks are obvious example for the safekeeping of money in accounts, keep records of payments, deposits and withdrawals and the use of debit / ATM cards and cheques as payment mechanisms.
– PROVIDING LIQUIDITY: Financial intermediaries can easily and cheaply convert an asset to payment. They make it easy to transform various assets into a means of payment through ATMs, cheques, debit cards etc.
– DIVERSIFYING RISK: Financial intermediaries assist investors diversify in ways they would be unable to do on their own. Banks for instance spread depositors’ funds over many types of loans, so that the default of any one loan does not put depositors’ funds in jeopardy.
– COLLECTING AND PROCESSING INFORMATION: Financial intermediaries are experts at collecting and processing information in order to accurately gauge the risks of various investments and to price them accordingly. The need to collect and process information comes from a fundamental asymmetric information problem inherent in financial markets.
A non-banking finance company (NBFC) also provides loans, but at a much higher rate as compared to banks. Mutual fund companies collate various funds and provide investment options to investors on the basis of their budget and risk appetite. These funds consist of shares, bonds, and other investment options. Stock exchanges facilitate the trading of stocks and other trading activities. A commission or brokerage is charged on each transaction done through mutual fund companies and stock exchanges. In the case of credit unions and building societies, these entities are formed to provide financial assistance to its members. Insurance companies provide insurance options to individuals and companies against risk and uncertainty, such as death, health, fire, business loss, etc. Investment banks assist mergers and acquisitions, IPOs, and provide other such services.
Name: Nwosu Sochima Anne
Dep: Economics
Reg no 2018/242291
Course: Eco 324
– First let’s recall that financial intermediaries are meant to bring together those economic agents with surplus funds who want to who want to lend (invest) to those with a shortage of funds who want to borrow.
* Now reconciling the conflicting preferences of lenders and borrowers is one of the cost benefits of using financial intermediaries and how do they do this? According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. This implies that financial intermediaries are middle participants in the exchange of financial assets.
* How risks averse intermediaries help spread out and decrease risks? Through diversification of loan risk(Diversification here means a strategy that mixes a wide variety of investments within a portfolio. Modern portfolio theory applied to a portfolio of private loans should have the same principles. The main objective for a lender diversifying a portfolio is minimizing exposure to any single borrower and reducing the risk of multiple borrowers defaulting in a specific industry or geographic region simultaneously.) financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
Name: Nwosu Sochima Anne
Dep: Economics
Reg no 2018/242291
Course: Eco 324
– First let’s recall that financial intermediaries are meant to bring together those economic agents with surplus funds who want to lend (invest) to those with a shortage of funds who want to borrow. In doing this, they offer the benefits of maturity and risk transformation. Specialist financial intermediaries are ostensibly enjoying a related (cost) advantage in offering financial services, which not only enables them to make profit, but also raises the overall efficiency of the economy. Their existence and services are explained by the “information problems” associated with financial markets.
* Reconciling the conflicting preferences of lenders and borrowers is one of the cost advantages of using financial intermediaries and how do they do this? According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. This implies that financial intermediaries are middle participants in the exchange of financial assets.
* How risks averse intermediaries help spread out and decrease risks? Through diversification of loan risk(Modern portfolio theory applied to a portfolio of private loans should have the same principles. The main objective for a lender diversifying a portfolio is minimizing exposure to any single borrower and reducing the risk of multiple borrowers defaulting in a specific industry or geographic region simultaneously.)financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
Name: Adigwe ifeoma Favour
Course code Eco 324
Reg no: 2018/241871
Department: Economics department
Question
Discuss how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk averse intermediaries help spread out and decrease risks.
Answer
Reconciling conflicting preferences of lenders and borrowers. Risk aversion intermediaries help spread out and decrease the risks. Economies of scope – intermediaries concentrate on the demands of the lenders and borrowers and are able to enhance their products and services (use same inputs to produce different outputs.
According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. … This implies that financial intermediaries are middle participants in the exchange of financial assets.
How risk averse intermediaries help spread out and decrease risks. Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
NAME: OWOH ANAYO JONATHAN
DEPT: ECONOMICS
REG NO: 2018/250325
COURSE TITLE: THE FINANCIAL SYSTEM
COURSE CODE: ECO 324
ANSWERS:
Financial intermediaries, all over the world play crucial roles in the development and growth of the economy. An economy is made up of fund raisers and fund suppliers. Financial intermediaries are those institutions in the financial market that mediate between the fund raisers and the fund suppliers. They carry out intermediation between surplus and deficit units of the economy.
Role of Financial Intermediaries
Fund suppliers cannot loan money directly to fund raisers, nor can fund raisers borrow money directly from fund suppliers. These transactions had to be done conveniently through financial intermediaries. They facilitate the exchange of funds between fund surplus units and fund deficit units. According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. Financial intermediaries, through financial intermediation, allow funds to be channeled from those that might not put them to use to those that would put them to productive use. The general name for the services supplied by financial intermediaries is financial intermediation. This implies that financial intermediaries are middle participants in the exchange of financial assets.
There are various types of financial intermediaries. These consist of depository intermediaries, contractual intermediaries, and Investment intermediaries. Depository intermediaries consist of commercial banks, thrifts, mutual savings banks, savings and loan associations, and credit union. Investment intermediaries are made up of investment companies and finance companies. They specialize in both money and capital market funds, which include treasury bills, commercial bank certificates of deposit, long term loans (debentures), and stocks. Contractual intermediaries consist of insurance companies and pension funds. They create instruments that form a contractual relationship with the buyer. These instruments consist of insurance plan, savings, annuity, pension, and loan privileges.
Gershenkron (1962) stated that banks are the largest financial intermediaries that effectively finance industrial expansion in developing countries. Banks are the largest financial intermediaries in the Nigerian economy. According to Schumpeter (1911) bank financial intermediation does not only entail creation of a pool of investible funds, it also involves allocating funds effectively.
Financial intermediaries helps in reconciling conflicting preferences of lenders and borrowers by performing the following functions:
– Pooling the resources of small savers: banks for example, pool many deposits and use these to make large items. Insurance companies collect and invest many small premiums in order to pay fewer large claims. Mutual funds accept small investment amounts and pool them to buy large stock and bond portfolios.
– Providing safekeeping, accounting, and payment mechanisms for resources: Banks are obvious example for the safekeeping of money in accounts, keep records of payments, deposits and withdrawals and the use of debit / ATM cards and cheques as payment mechanisms.
– Providing liquidity: Financial intermediaries can easily and cheaply convert an asset to payment. They make it easy to transform various assets into a means of payment through ATMs, cheques, debit cards etc.
– Diversifying risk: Financial intermediaries assist investors diversify in ways they would be unable to do on their own. Banks for instance spread depositors’ funds over many types of loans, so that the default of any one loan does not put depositors’ funds in jeopardy.
– Collecting and processing information: Financial intermediaries are experts at collecting and processing information in order to accurately gauge the risks of various investments and to price them accordingly. The need to collect and process information comes from a fundamental asymmetric information problem inherent in financial markets.
Name: Nwogwugwu Chisom Jennifer
Reg no: 2018/245129
Eco 324 Assignment
Clearly discuss how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk averse intermediaries help spread out and decrease risks.
Answer:
Fund suppliers cannot loan money directly to fund raisers, nor can fund raisers borrow money directly from fund suppliers. These transactions had to be done conveniently through financial intermediaries. Financial intermediaries, all over the world play crucial roles in the development and growth of the economy. An economy is made up of fund raisers and fund suppliers. Financial intermediaries are those institutions in the financial market that mediate between the fund raisers and the fund suppliers. They carry out intermediation between surplus and deficit units of the economy.
Financial intermediaries, through financial intermediation, allow funds to be channeled from those that might not put them to use to those that would put them to productive use. The general name for the services supplied by financial intermediaries is financial intermediation.
How risk averse intermediaries help spread out and decrease risks:
This implies that financial intermediaries are middle participants in the exchange of financial assets. Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
Banks convert short-term liabilities (demand deposits) into long-term assets by providing loans; thereby transforming maturities. Additionally, through d lending practices, banks are able to lend monies to high-risk entities and by pooling with low-risk loans are able to gain in yield while implementing risk management.
Financial intermediaries can assist with increasing the incentive to save through developing financial products that offer ease of liquidation but provide a higher return than a savings account. In this manner, financial intermediaries are a significant component to the transformation of savings into investment. Mutual funds, pension obligations, insurance annuities, and other forms of savings marketed by financial intermediaries all consist of stocks, bonds, and cash balances, which in turn pay for the investment capital that increases productivity, efficiency and output of goods and services.
ONUOHA IKENNA MICHAEL
2018/241860
Given the fact that financial intermediaries aid in the channeling of funds from from the savers (lenders) to those whose do not have enough to carry out their activities (borrowers), they are some advantages to which financial intermediaries can be used;
A. The first is reconciling conflicting preferences of lenders and borrowers, that is, when using a financial intermediary, search cost, that is, the resources (both time and energy) used to find the right buyer and seller is the market is lower as they are specialist that can reconcile the lenders and the buyers.
B. Secondly, risk aversion. Intermediaries can help in spreading out risk so as to decrease them. This is done by lending money to a variety of borrowers instead of lending to a single individual and by so doing funds won’t be lost even if one fails.
2018/245647
Economics
A financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions, financial intermediaries channel funds from people who have surplus capital (savers) to those who require liquid funds to carry out a desired activity (investors). Now a commercial bank which is an example of a financial intermediary resolve conflicting preferences of lenders and borrowers by providing different types of loans to customers and charging interest.
The funds banks give out to borrowers are from money deposited by the bank customers in saving accounts, checking accounts, money market accounts, and certificates of deposit (CDs). The depositors earn interest on their deposits with the bank. However, the interest paid to depositors is less than the interest rate charged to borrowers.
Financial intermediaries also reconcile these conflicts by charging high interest rates to depositors running fixed deposit accounts who wants to withdraw their money before the stipulated or supposed date. They do this because, the funds deposited are already loaned out to borrowers, so the high rate charged on the defaulting customer who wants to withdraw money is used to settle any inconveniences the customer might have caused the bank.
How risk averse intermediaries help spread out and decrease risks;
The idea behind reinsurance is relatively simple. Insurance companies write policies covering their customers from potential losses. Yet those insurers have to take care to manage their risk effectively, or else they might leave themselves open to devastating losses that would jeopardize their business if an unlikely sequence of loss events happens. In particular, insurance companies that primarily serve a specific geographical area might find themselves with too much exposure in case of a localized catastrophic event, and an insurer that covers very specific types of risk could get overwhelmed if unfortunate circumstances lead to excessive losses.
So, reinsurance companies help insurers spread out their risk exposure. Insurers pay part of the premiums that they collect from their policyholders to a reinsurance company, and in exchange, the reinsurance company agrees to cover losses above certain high limits. That puts a cap on the insurer’s maximum possible loss, and it leaves the reinsurance company with the responsibility to figure out how to cover what can amount to massive losses if a major disaster does strike.
Name: Okoye Adaezechukwu precious
Reg No: 2018/241831
Course code/title: Eco 324 ( Financial market and Institutions)
Date: 27/01/2022
Assignment
Against this background, clearly discuss how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk averse intermediaries help spread out and decrease risks.
How Financial intermediaries help in reconciling conflict preference of lenders and borrowers
Financial intermediaries like the commercial banks helps to settle the conflicting interest of the lenders and borrowers. The lenders have extra cash and does not need to make use of it for some time, say half a year, a year or more than. The borrowers needed cash to run some businesses or transactions. Financial intermediaries serves as middle men or mediator between this lenders and borrowers. They accept the extra cash from the lenders and give them out to the borrowers at a given interest rate. By so doing, the financial intermediaries (e.g commercial banks) helps to settle the conflicting interest of the lenders and borrowers.
Fund suppliers cannot loan money directly to fund raisers, nor can fund raisers borrow money directly from fund suppliers. These transactions had to be done conveniently through financial intermediaries. They facilitate the exchange of funds between fund surplus units and fund deficit units. According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. Financial intermediaries, through financial intermediation, allow funds to be channeled from those that might not put them to use to those that would put them to productive use. The general name for the services supplied by financial intermediaries is financial intermediation. This implies that financial intermediaries are middle participants in the exchange of financial assets.
How risk averse intermediaries help spread out and decrease risk.
Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. … This implies that financial intermediaries are middle participants in the exchange of financial assets.
Financial intermediaries are meant to bring together those economic agents with surplus funds who want to lend (invest) to those with a shortage of funds who want to borrow.[10] In doing this, they offer the benefits of maturity and risk transformation. Specialist financial intermediaries are ostensibly enjoying a related (cost) advantage in offering financial services, which not only enables them to make profit, but also raises the overall efficiency of the economy. Their existence and services are explained by the “information problems” associated with financial markets.
NAME: E-PATRICK DALOSAH
REG NUMBER: 2018/242457
DEPARTMENT:ECONOMICS
LEVEL:300
COURSE CODE: ECO 324
Fund suppliers cannot loan money directly to fund raisers, nor can fund raisers borrow money directly from fund suppliers. These transactions had to be done conveniently through financial intermediaries. They facilitate the exchange of funds between fund surplus units and fund deficit units. According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. Financial intermediaries, through financial intermediation, allow funds to be channeled from those that might not put them to use to those that would put them to productive use. The general name for the services supplied by financial intermediaries is financial intermediation. This implies that financial intermediaries are middle participants in the exchange of financial assets.
There are various types of financial intermediaries. These consist of depository intermediaries, contractual intermediaries, and Investment intermediaries. Depository intermediaries consist of commercial banks, thrifts, mutual savings banks, savings and loan associations, and credit union. Investment intermediaries are made up of investment companies and finance companies. They specialize in both money and capital market funds, which include treasury bills, commercial bank certificates of deposit, long term loans (debentures), and stocks. Contractual intermediaries consist of insurance companies and pension funds. They create instruments that form a contractual relationship with the buyer. These instruments consist of insurance plan, savings, annuity, pension, and loan privileges.
Gershenkron (1962) stated that banks are the largest financial intermediaries that effectively finance industrial expansion in developing countries. Banks are the largest financial intermediaries in the Nigerian economy. According to Schumpeter (1911) bank financial intermediation does not only entail creation of a pool of investible funds, it also involves allocating funds effectively.
The process creates efficient markets and lowers the cost of conducting business. For example, a financial advisor connects with clients through purchasing insurance, stocks, bonds, real estate, and other assets.
financial intermediaries pool risk by spreading funds across a diverse range of investments and loans. Loans benefit households and countries by enabling them to spend more money than they have at the current time.
Financial intermediaries also provide the benefit of reducing costs on several fronts. For instance, they have access to economies of scale to expertly evaluate the credit profile of potential borrowers and keep records and profiles cost-effectively. Last, they reduce the costs of the many financial transactions an individual investor would otherwise have to make if the financial intermediary did not exist.
Name: Kalu Divine Oluchi
Reg No:2018/249490
Department:Economics Major
Course:ECO 324
Question:
Financial intermediation consists of “channeling funds between surplus and deficit agents”. A financial intermediary is a financial institution that connects surplus and deficit agents. The classic example of a financial intermediary is a bank that consolidates bank deposits and uses the funds to transform them into bank loans. Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. As such, financial intermediaries channel funds from people who have extra money or surplus savings (savers) to those who do not have enough money to carry out a desired activity (borrowers).
Against this background, clearly discuss how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk averse intermediaries help spread out and decrease risks
ANSWER
According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. … This implies that financial intermediaries are middle participants in the exchange of financial assets.
Reconciling conflicting preferences of lenders and borrowers
– When using a financial
intermediary one tends to have lower search costs as they don’t have to find the right
lenders, you leave that to a specialist.
Risk aversion
– intermediaries help spread out and decrease the risks.
Rather than lending to
just one individual, you can deposit money with a financial intermediary who lends to a
variety of borrowers – if one fails, you won’t lose all your funds.
Economies of scale –
using financial intermediaries reduces the costs of lending and
borrowing. A bank can become efficient in collecting deposits, and lending. This enables
economies of scale – lower average costs. If you had to seek out your own saving, you might
have to spend a lot of time and effort to investigate best ways to save and borrow.
Economies of scope –
intermediaries concentrate on the demands of the lenders and
borrowers and are able to enhance their products and services (use same inputs to produce
different outputs).
Convenience of Amounts –
The bank can lend you the aggregate deposits from the bank and
save you finding someone with the exact right sum. If you want to borrow R10, 000 – it
would be difficult to find someone who wanted to lend exactly R10, 000. But, a bank may
have 1,000 people depositing R10 each.
By accepting many small deposits, banks
empower themselves to make large loans..
Reconciling conflicting preferences of lenders and borrowers. Risk aversion intermediaries help spread out and decrease the risks. … Economies of scope – intermediaries concentrate on the demands of the lenders and borrowers and are able to enhance their products and services (use same inputs to produce different outputs …
JOSEPH RUTH TOCHUKWU
2018/245132
ECONOMICS DEPARTMENT
ASSIGNMENT ON ECO 324
How does financial intermediaries reconcile conflicting preferences of lenders and borrowers?
In a conflict of interest, a person or organisation has multiple interests which relate to a situation, giving rise to the risk that by serving one of those interests, they will fail to properly serve another interest.
Conflicting preference between the lenders and the borrowers is also known as principal-agent problem. The lender will want to avoid the risk of losing his money; in the case of a failed project and the borrower will want to get the best possible terms of loan repayment. One way financial intermediaries,like banks settle this conflict is to get the borrower to deposit some of his wealth into the project. This will ensure the alignment of the lender and borrower interest. Another common way to align lender and borrower preferences is the use of collateral as a requirement for loan disbursement. Here, what is required of the borrower is to set aside property that will be transferred to the lender, if the borrower defaults in repayment. By adopting these two simple measures, financial intermediaries are able to reconcile the conflicting preferences of lenders and borrowers.
On the other hand,when a customer makes premature withdrawal, he is charged. He either loses his interest on investment or part of the money invested. With this,the bank is able to offset its debt.
What Does Risk Spread Mean?
Risk spread is a business strategy employed by insurance companies. It involves selling insurance covering the same risk in one period or selling a huge number of policies with different coverage in many areas. Spreading out risk in this way allows insurers to avoid paying claims that threaten to ruin their financial health, as could happen if all of their risks were not diversified. This can also be called reinsurance.
Reinsurance occurs when multiple insurance companies share risk by purchasing insurance policies from other insurers to limit their own total loss in case of disaster. Described as “insurance of insurance companies” by the Reinsurance Association of America, the idea is that no insurance company has too much exposure to a particularly large event or disaster.
By spreading risk, an individual insurance company can take on clients whose coverage would be too great of a burden for the single insurance company to handle alone. When reinsurance occurs, the premium paid by the insured is typically shared by all of the insurance companies involved.
If one company assumes the risk on its own, the cost could bankrupt or financially ruin the insurance company and possibly not cover the loss for the original company that paid the insurance premium.
Insurers purchase reinsurance for four reasons: To limit liability on a specific risk, to stabilize loss experience, to protect themselves and the insured against catastrophes, and to increase their capacity.
Name: Ezeh Uchechukwu Evelyn
Reg no: 2018/241821
Department: Economics
discuss how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk averse intermediaries help spread out and decrease risks
Reconciling conflicting preferences of lenders and borrowers When using a financial intermediary one tends to have lower search costs as they don’t have to find the right lenders, you leave that to a specialist. Risk aversion intermediaries help spread out and decrease the risks. Rather than lending to just one individual, you can deposit money with a financial intermediary who lends to avariety of borrowers. If one fails, you won’t lose all your funds. Economies of scale using financial intermediaries reduces the costs of lending and borrowing. A bank can become efficient in collecting deposits, and lending. This enables economies of scale lower average costs. If you had to seek out your own saving, you might have to spend a lot of time and effort to investigate best ways to save and borrow .Economies of scope intermediaries concentrate on the demands of the lenders and borrowers and are able to enhance their products and services (use same inputs to produce different outputs).
Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities. According to economic theory, financial intermediaries are established, among others, to overcome information asymmetries, reduce transaction costs and share and diversify risks. Domestically, financial intermediaries share risks by diversifying asset holdings across sectors, regions and generations. Through a financial intermediary, savers can pool their funds, enabling them to make large investments, which in turn benefits the entity in which they are investing. At the same time, financial intermediaries pool risk by spreading funds across a diverse range of investments and loans.
EYA Samson Nnaemeka
2018/249599
Economics major
how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk averse intermediaries help spread out and decrease risks
Major functions of financial intermediaries
As noted, financial intermediaries provide access to capital. However, in conjunction with increasing access to funds, through their ability to aggregate funds, intermediaries also reduce the transaction and search costs between lenders and borrowers.
By repurposing funds from savers to borrowers financial intermediaries are able to promote economic growth by providing access to capital. Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
Returning to the example of a bank used above, banks convert short-term liabilities (demand deposits) into long-term assets by providing loans; thereby transforming maturities. Additionally, through diversified lending practices, banks are able to lend monies to high-risk entities and by pooling with low-risk loans are able to gain in yield while implementing risk management.
Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
Role of Financial Intermediaries
Fund suppliers cannot loan money directly to fund raisers, nor can fund raisers borrow money directly from fund suppliers. These transactions had to be done conveniently through financial intermediaries. They facilitate the exchange of funds between fund surplus units and fund deficit units. According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. Financial intermediaries, through financial intermediation, allow funds to be channeled from those that might not put them to use to those that would put them to productive use. The general name for the services supplied by financial intermediaries is financial intermediation. This implies that financial intermediaries are middle participants in the exchange of financial assets.
There are various types of financial intermediaries. These consist of depository intermediaries, contractual intermediaries, and Investment intermediaries. Depository intermediaries consist of commercial banks, thrifts, mutual savings banks, savings and loan associations, and credit union. Investment intermediaries are made up of investment companies and finance companies. They specialize in both money and capital market funds, which include treasury bills, commercial bank certificates of deposit, long term loans (debentures), and stocks. Contractual intermediaries consist of insurance companies and pension funds. They create instruments that form a contractual relationship with the buyer. These instruments consist of insurance plan, savings, annuity, pension, and loan privileges.
Gershenkron (1962) stated that banks are the largest financial intermediaries that effectively finance industrial expansion in developing countries. Banks are the largest financial intermediaries in the Nigerian economy. According to Schumpeter (1911) bank financial intermediation does not only entail creation of a pool of investible funds, it also involves allocating funds effectively.
Financial intermediaries perform five functions:
Pooling the resources of small savers: banks for example, pool many deposits and use these to make large items. Insurance companies collect and invest many small premiums in order to pay fewer large claims. Mutual funds accept small investment amounts and pool them to buy large stock and bond portfolios.
Providing safekeeping, accounting, and payment mechanisms for resources: Banks are obvious example for the safekeeping of money in accounts, keep records of payments, deposits and withdrawals and the use of debit / ATM cards and cheques as payment mechanisms.
Providing liquidity: Financial intermediaries can easily and cheaply convert an asset to payment. They make it easy to transform various assets into a means of payment through ATMs, cheques, debit cards etc.
Diversifying risk: Financial intermediaries assist investors diversify in ways they would be unable to do on their own. Banks for instance spread depositors’ funds over many types of loans, so that the default of any one loan does not put depositors’ funds in jeopardy.
Collecting and processing information: Financial intermediaries are experts at collecting and processing information in order to accurately gauge the risks of various investments and to price them accordingly. The need to collect and process information comes from a fundamental asymmetric information problem inherent in financial markets.
Financial Intermediaries and Asymmetric Information
Financial markets have a lot of asymmetric information. Borrowers and debt / stock issuers know much more about their likelihood of success than potential lenders and investors. Asymmetric information causes one group with better information to use this advantage at the expense of the less-informed group. Asymmetric information can cause financial markets to function inefficiently or even break down completely. However financial intermediaries use their size and expertise to minimize them.
Asymmetric information can be of two types. It can be due to adverse selection and moral hazard. The problem of adverse selection arises before a financial asset is bought or sold. The worst candidates (adverse) are more likely to be selected for the transaction. People who are bad credit risks are more likely to try to get a loan than those who are good credit risks. Banks are however, experts at assessing credit risk and distinguishing the good from the bad. The problem of moral hazard arises after the loan is made. The risk that the borrower of a loan may misuse the loan (immoral) and be unable to pay is known as moral hazard. Banks are experts in monitoring and enforcing lending contracts in order to minimize the moral hazard problem.
Previous Studies on the Role of Financial Intermediaries
Several theoretical models posit that financial intermediaries mitigate the costs associated with information acquisition and the conduct of financial transactions (Benston and Smith, Jr., 1975). Other studies show that financial intermediaries make provision for insurances and risk sharing (Allen and Gale, 1997, 2004), stimulates the funding of liquidity needs through credit lines (Holmstrom and Tirole, 1998), and aid the creation of specialized products (Benstom and Smith, Jr. 1975). Several studies have dwelt on the significance of financial intermediation. However there are mixed feelings about it. Some argue that it facilitates the efficiency of the financial system (Gromb and Vayanos, 2010; Anad and Subrahmanyam, 2008), others argue that it is a means of carrying out monetary policy (Benston and Smith, Jr. 1975). Still others argue that financial intermediaries through financial intermediation stimulate the restructuring and liquidation of distressed firms (Araujo and Minetti, 2007).
Name: Eze Ngozi Josephine
Reg No: 2018/241825
Email: josephinengozi2030@gmail.com
Dept: Economics
Course: Eco 324
A financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds, and stock exchanges. Financial intermediaries reallocate otherwise uninvested capital to productive enterprises through a variety of debt, equity, or hybrid stakeholding structures.
Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. As such, financial intermediaries channel funds from people who have surplus capital (savers) to those who require liquid funds to carry out a desired activity (investors).
A financial intermediary is typically an institution that facilitates the channeling 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, and eliminate the financial intermediary, which is known as financial disintermediation.
In the context of climate finance and development, financial intermediaries generally refer to private sector intermediaries, such as banks, private equity, venture capital funds, leasing companies, insurance and pension funds, and micro-credit providers. Increasingly, international financial institutions provide funding via companies in the financial sector, rather than directly financing projects.
How do financial intermediaries benefit by providing risk-sharing services? They are able to earn a profit on the spread between the returns they earn on risky assets and the payments they make on the assets they have sold.
Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
Financial intermediaries may help improving the saving rates, to influence the economic development by improving the quality of financial services and reducing the transaction cost to narrow the spreads between borrowing and lending rates.
Name: Ik-Ukennaya Ezekiel
Reg. No: 2018/249 788
Department: Economics
Email: ezekielikukennaya4@gmail.com
Eco. 324 —21/01/2022 (Online Discussion/Quiz 2—Financial intermediation)
Question:
Clearly discuss how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk averse intermediaries help spread out and decrease risks.
Comment
Financial intermediaries have been of great help in facilitating the smooth flow of fund from the surplus to the deficit economic agents. They are entities that facilitate transaction between two parties. Thus, a financial intermediary is a financial institution that connects surplus and deficit agents. A typical example is bank. Bank consolidates bank deposits and transform them into bank loans. The activity of financial intermediaries is known as financial intermediation. Through the process of financial intermediation, certain assets or liability are transformed into different assets or liabilities . By this, the financial intermediaries channel the savings of those who have extra money to those who do not have enough money to carry out a desired activity known as borrowers.
Financial intermediaries reconcile the conflicting preferences of lenders and borrowers through one of their three major functions called maturity transformation. In this, the bank converts short- term liabilities to long- term assets and this makes bank to deal with large number of lenders and borrowers and reconcile their conflicting needs.
The risk averse intermediaries help spread out and decrease risks by lending to multiple borrowers to spread the risk and by doing so, they convert risky investment into relatively risk-free ones. This function of the financial intermediaries is known as Risk transformation.
Name: Stephen Faith Kuranen
Reg.no: 2018/242333
Dept: Economics
Course: Eco 262 (Developmental Economics II)
What are the Pros and Cons?
Globalization fosters economic growth for global corporations at the expense of the world’s peoples. Growth is accompanied by greater economic instability and financial crises.
PROS
• Open markets drive higher national output of goods and services and economic growth.
• And rising per capita income growth: Economic freedom equates with a higher living standard: per capita income of the most economically free nations averaged over $18,000 in 1997, but just $1,700 in the least free.
The rich are getting richer: Countries with more than half of their populations living below the national poverty line in the 1990s included Azerbaijan, Chad, Gambia, Haiti,
Honduras, Madagascar, Mauritania, Nicaragua, Niger, Peru, Sierra Leone, Tanzania, Vietnam, and Zambia-all of these countries experienced substantial declines in annual export volume from 1980 to 1997.
• Consumers in countries with open markets and trade-driven economic growth enjoy lower prices, improved consumption, and rising standards of living.
• A growing, vibrant economy results in a cleaner environment.
• Living standards, health, leisure time, and recreation all benefited from the spread of industrialization and economic growth.
•Globalization accelerates economic growth, increasing standards of living.
•Globalization increases employment and wages and helps improve working conditions.
•Globalization benefits the consumer by increasing income and offering greater varieties of lower-prices products and services.
•Globalization fosters the growth of democratic governments, which have almost doubled worldwide in just the last decade.
•Globalization helps developing nations by accelerating economic
•Globalization helps protect human rights. Economic freedom and political freedom are closely linked.
•The culmination of globalization and technology has resulted in a quality of life unimaginable one hundred years ago. Life expectimproved dramatically worldwide.Life expectancy, literacy, human health, leisure, and living standards have improved drastically worldwide.
•Globalization helps clean up and protect the environment by providing the national wealth to undertake environmental improvements.
Cons.
• Corporate expansion worldwide enriches businesses, but at the expense of workers’ jobs and wages.
• The lending and trade practices of the International Monetary Fund (IMF), World Bank, and World Trade Organization (WTO) exact a terrible price on the peoples of the developing world.
• Total external debt, public and private, has increased dramatically among the developing regions of the world.
• Globalization subjects the peoples of the world to financial crises and poverty in the name of corporate greed.
• Globalization threatens the sovereignty of the nationstate by undermining national laws and regulations with the power of world trade.
• Globalization supports a world trade in human bondage and slavery factories with poor working conditions and abuses of workers’ rights. trapped in poverty.
• Globalization subjects developing nations to severe trade and financial lending practices, keeping nations trapped in depts and in poverty.
• Globalization exploits local environments in the quest for corporate profit and contributions to worldwide global warming.
• Globalization threatens public health, local economies, and the social fabric of agriculturally based societies.
References.
Weidenbaum, Murray L. and Batterson, Robert, “The Pros and Cons of Globaization”, Special 7, 2001,
doi:10.7936/K71C1V2Z.
Murray Weidenbaum Publications, https://openscholarship.wustl.edu/mlw_papers/175.
Name: Obiora Chidimma Jennifer
Dept: Economics Department
Course: Eco 324(Financial Markets and Institutions).
Date: 27th January,2022
1. Fund suppliers cannot loan money directly to fund raisers, nor can fund raisers borrow money directly from fund suppliers. These transactions had to be done conveniently through financial intermediaries. They facilitate the exchange of funds between fund surplus units and fund deficit units. According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. Financial intermediaries, through financial intermediation, allow funds to be channeled from those that might not put them to use to those that would put them to productive use. The general name for the services supplied by financial intermediaries is financial intermediation. This implies that financial intermediaries are middle participants in the exchange of financial assets.
There are various types of financial intermediaries. These consist of depository intermediaries, contractual intermediaries, and Investment intermediaries. Depository intermediaries consist of commercial banks, thrifts, mutual savings banks, savings and loan associations, and credit union. Investment intermediaries are made up of investment companies and finance companies. They specialize in both money and capital market funds, which include treasury bills, commercial bank certificates of deposit, long term loans (debentures), and stocks. Contractual intermediaries consist of insurance companies and pension funds. They create instruments that form a contractual relationship with the buyer. These instruments consist of insurance plan, savings, annuity, pension, and loan privileges.
Gershenkron (1962) stated that banks are the largest financial intermediaries that effectively finance industrial expansion in developing countries. Banks are the largest financial intermediaries in the Nigerian economy. According to Schumpeter (1911) bank financial intermediation does not only entail creation of a pool of investible funds, it also involves allocating funds effectively.
2. A risk averse investor is an investor who prefers lower returns with known risks rather than higher returns with unknown risks. In other words, among various investments giving the same return with different level of risks, this investor always prefers the alternative with least interest. A risk-averse investor avoids risks. He or she stays away from high-risk investments and prefers investments that provide a sure return. The person will pass up the opportunity for a large gain in favor of safety.
If an agent’s willingness to invest in risky asset increases with wealth, we say that he has decreasing relative risk aversion (RRA). If agent has decreasing RRA, if he is willing to invest in risky asset when his wealth is w1, he will also be willing to invest in risky asset when his wealth is w2 > w1.
References:
m.economictimes.com
Journals.univ-danubius.ro
http://www.google.com
NAME: Eze Nnenna Anthoniatta
Reg no:2018/248095
Department:Economics
Email:nnennaeze08@gmail.com
QUESTION
discuss how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk averse intermediaries help spread out and decrease risks.
ANSWERS
financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. Financial intermediary is an institution that facilitates the channeling of funds between lenders and borrowers indirectly. That is, lenders give funds to an intermediary institution (such as a bank), and that institution gives those funds to borrowers. This may be in the form of loans or mortgages.Alternatively, they may lend the money directly via the financial markets, and eliminate the financial intermediary, which is known as financial disintermediation.
Financial intermediaries move funds from parties with excess capital to parties needing funds. The process creates efficient markets and lowers the cost of conducting business. For example, a financial advisor connects with clients through purchasing insurance, stocks, bonds, real estate, and other assets.
Now in relation to the risk aversion, For example, a risk-averse investor might choose to put his or her money into a bank account with a low but guaranteed interest rate, rather than into a stock that may have high returns, but also has a chance of becoming worthless. Similarly,If an agent’s willingness to invest in risky asset increases with wealth, we say that he has decreasing relative risk aversion (RRA). – If agent has decreasing RRA, if he is willing to invest in risky asset when his wealth is w1, he will also be willing to invest in risky asset when his wealth is w2 > w1.
That isn’t same with increase in risk aversion because an increase in relative risk aversion increases the impact of households’ money holdings on the overall economy. In other words, the more the relative risk aversion increases, the more money demand shocks will impact the economy.
Name: OSIKE SOLOMON UGOCHUKWU
Reg.No:2018/242458
Department: Economics
Question
Discuss how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk averse intermediaries help spread out and decrease risks.
Answer
Financial intermediaries serve as middlemen for financial transactions, generally between banks or funds. These intermediaries help create efficient markets and lower the cost of doing business. Intermediaries can provide leasing or factoring services, but do not accept deposits from the public.
financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. … This implies that financial intermediaries are middle participants in the exchange of financial assets.
The financial system brings together savers and borrowers by channeling funds from savers to borrowers while giving savers claims on borrowers´ future income. The financial system achieves this transfer by creating financial instruments, which are assets for savers and liabilities for borrowers.
Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
Abalihi Chukwuebuka Ernest
2018/245128
Economics
Financial intermediation consists of “channeling funds between surplus and deficit agents”. A financial intermediary is a financial institution that connects surplus and deficit agents. The classic example of a financial intermediary is a bank that consolidates bank deposits and uses the funds to transform them into bank loans.
Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. As such, financial intermediaries channel funds from people who have extra money or surplus savings (savers) to those who do not have enough money to carry out a desired activity (borrowers).
Against this background, clearly discuss how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk averse intermediaries help spread out and decrease risks?
A financial intermediary is an institution that facilitates the flow of funds between individuals or other economic entities having a surplus of funds (savers) to those running a deficit of funds (borrowers). Banks are a classic example of financial institutions.
Banks provide a safe and accessible environment for individuals and economic entities to deposit excess funds Additionally, banks also provide a service by packaging deposits into loans that are made available to economic agents (individuals and entities) in need of funds.
Though, perhaps the most well-known of financial intermediaries, banks represent only one intermediary within a larger group. Other financial intermediaries include: credit unions, private equity, venture capital funds, leasing companies, insurance and pension funds, and micro-credit providers.
Major functions of financial intermediaries
As noted, financial intermediaries provide access to capital. However, in conjunction with increasing access to funds, through their ability to aggregate funds, intermediaries also reduce the transaction and search costs between lenders and borrowers.
By repurposing funds from savers to borrowers financial intermediaries are able to promote economic growth by providing access to capital. Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
Returning to the example of a bank used above, banks convert short-term liabilities (demand deposits) into long-term assets by providing loans; thereby transforming maturities. Additionally, through diversified lending practices, banks are able to lend monies to high-risk entities and by pooling with low-risk loans are able to gain in yield while implementing risk management.
Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
Okoli chibuzor Divinelove
Eco 324
2018/249713
According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. … This implies that financial intermediaries are middle participants in the exchange of financial assets.
The financial system brings together lenders and borrowers by channeling funds from lenders to borrowers while giving lenders claims on borrowers´ future income. The financial system achieves this transfer by creating financial instruments, which are assets for savers and liabilities for borrowers.
Okpara Favour Amarachi
2018/248953
favouramy363@gmail.com
Assignment
Financial intermediation consists of “channeling funds between surplus and deficit agents”. A financial intermediary is a financial institution that connects surplus and deficit agents. The classic example of a financial intermediary is a bank that consolidates bank deposits and uses the funds to transform them into bank loans.
Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. As such, financial intermediaries channel funds from people who have extra money or surplus savings (savers) to those who do not have enough money to carry out a desired activity (borrowers).
Against this background, clearly discuss how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk averse intermediaries help spread out and decrease risks
ANSWER
Fund suppliers cannot loan money directly to fund raisers, nor can fund raisers borrow money directly from fund suppliers. These transactions had to be done conveniently through financial intermediaries. They facilitate the exchange of funds between fund surplus units and fund deficit units. According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. Financial intermediaries, through financial intermediation, allow funds to be channeled from those that might not put them to use to those that would put them to productive use. The general name for the services supplied by financial intermediaries is financial intermediation. This implies that financial intermediaries are middle participants in the exchange of financial assets.
On the other hand,let us take the project finance division of a bank as a financial intermediary,this division is exposed to risks that are particular to its lending and trading businesses and the environment within which it operates. The major goal of project finance in risk management is to ensure that it understands, measures, and monitors the various risks that arise and that the organization adheres strictly to the policies and procedures established to address these risks. Firms have a structured credit approval process which includes a well-established procedure for comprehensive credit appraisal.
In order to assess the credit risk associated with any financial proposal, the project finance division of the firm first assesses a variety of risks relating to the borrower and the relevant industry.
The borrower credit risk is evaluated by considering:
The financial position of the borrower, by analyzing the quality of its financial statements, its past financial performance, its financial flexibility in terms of the ability to raise capital, and its capital adequacy
The borrower’s relative market position and operating efficiency
The quality of management, by analyzing its track record, payment record, and financial conservatism
Industry-specific credit risk is evaluated by considering:
Certain industry characteristics, such as the importance of the industry to the economic growth of the economy and government policies relating to the industry
The competitiveness of the industry
Certain industry financials, including return on capital employed, operating margins, and earnings stability
Name:Bamiduro ibukun obianuju
Reg No:2018/243749
Department: Economics
Course: Eco 324
Question
Financial intermediation consists of “channeling funds between surplus and deficit agents”. A financial intermediary is a financial institution that connects surplus and deficit agents. The classic example of a financial intermediary is a bank that consolidates bank deposits and uses the funds to transform them into bank loans.
Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. As such, financial intermediaries channel funds from people who have extra money or surplus savings (savers) to those who do not have enough money to carry out the desired activity (borrowers).
Against this background, discuss how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk-averse intermediaries help spread out and decrease risks
Answer
Reconciling conflicting preferences of lenders and borrowers- When using a financial intermediary one tends to have lower search costs as they don’t have to find the right lenders, you leave that to a specialist.
Risk aversion- intermediaries help spread out and decrease the risks. Rather than lending to just one individual, you can deposit money with a financial intermediary who lends to a variety of borrowers. If one fails, you won’t lose all your funds.
Economies of scale -using financial intermediaries reduces the costs of lending and borrowing. A bank can become efficient in collecting deposits, and lending. This enables economies of scale – lower average costs. If you had to seek out your savings, you might have to spend a lot of time and effort to investigate the best ways to save and borrow.
Economies of scope -intermediaries concentrate on the demands of the lenders and borrowers and can use their products and services (use same inputs to produce different outputs).
The convenience of Amounts -The bank can lend you the aggregate deposits from the bank and save If you want to borrow.By accepting many small deposits, banks empower themselves to make large loans.
Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. As such, financial intermediaries channel funds from people who have surplus capital to those who require liquid funds to carry out the desired activity.
A financial intermediary is typically an institution that facilitates the channeling of funds between lenders and borrowers indirectly. That is, savers give funds to an intermediary institution, and that institution gives those funds to. This may be in the form of loans or mortgages. Alternatively, they may lend the money directly via the financial markets, and eliminate the financial intermediary, which is known as financial disintermediation.
In the context of climate finance and development, financial intermediaries generally refer to private sector intermediaries, such as banks, private equity, venture capital funds, leasing companies, insurance, and pension funds, and micro-credit providers. Increasingly, international financial institutions provide funding via companies in the financial sector, rather than directly financing projects.
According to Thompson (1982), financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower.This implies that financial intermediaries are middle participants in the exchange of financial assets.
How risk-averse intermediaries help spread out and decrease risks:
Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
PROS OF GLOBALISATION
1. Globalization facilitates trade.
2. Better job Opportunities.
3. Increase in global GDP.
4. Global research collaborations.
5. Changes in value systems.
6. Reduction in labour exploitation.
CONS OF GLOBALISATION
1. Food speculation.
2. land speculation.
3. Increase in consumption per capita.
4. Increase in average pollution levels.
5. Increase in migration.
6. Facilitation of money laundering.
Name :Onuh Onyinye
Reg number :2018 /241872
Department :Economics department
Email :onuhonyinye7@gmail.com
Financial intermediaries provide a middle ground between two parties in any financial transaction. A prime example would be a bank, which serves many different roles: it acts as a middleman between a borrower and a lender, and pools together funds for investment. However, there are many types of financial intermediaries, which we’ll explore below.
Financial intermediation meaning
Financial intermediation refers to the practice of linking an investor and borrower. Acting as a third party, an intermediary aims to meet the financial needs of both parties to mutual satisfaction. Looking at the wider picture, intermediaries benefit consumers and businesses alike by offering services on a larger economy of scale than would otherwise be possible. A financial intermediary serves two fundamental purposes:
Creating funds
Managing the payments systems
Typically, the intermediary accepts a deposit from the investor or lender, passing this on to the borrower at a high interest rate to make up their own margin. At the same time, they make the market more efficient by conducting these activities on a large scale, lowering the overall cost of doing business.
How does the intermediation process work?
When banks act as financial intermediaries, they can accept deposits. However, other types of intermediaries don’t involve a deposit. Instead, the intermediation process involves the movement of funds from one party to another. The intermediary acts as a factor in this case, managing the cash flow.
Examples of this type of intermediary could include a financial advisor, who connects investors with businesses, or a pension fund that collects money from members and distributes payments to pensioners.
Borrowers and Savers
There are two main roles in the financial intermediation process: borrowers, also known as spenders and savers, also called lenders. Let’s look at borrowers first. Borrowers need money for various reasons: to purchase a home, start a business, pay for business expenses and fund programs. They need money to spend. Borrowers include individuals, companies and the government. All three have a need to borrow money.
The second role in the process is savers. Savers have money, which is why they’re also called lenders. They have the money to lend. Savers not only have money in savings accounts, they have money deposited in other interest earning products, such as retirement accounts and certificate of deposits. Savers include individuals, companies and the government.
individuals, companies and government can be both borrowers and savers. They all do both; they both borrow and save money. Now, let’s look at who channels these monies back and forth between borrowers and savers.
Examples
If someone asked you to name a financial intermediary that helps move funds from lenders to spenders, you probably would say a bank. And you would be correct. A bank is considered a depository financial intermediary, where savers deposit money and spenders borrow that money.
Another type of financial intermediary is a non-depository institution, such as an insurance company. Insurance companies collect premiums for various types of coverages: auto, home and liability.
They do not immediately pay out all of the premiums in losses. They invest the money, channeling funds from spenders, the people who they collected the premiums from.
The last type of financial intermediary is an investment intermediary, such as an investment bank. They take in money from investors and spenders and invest the monies in interest and profit-earning products.
Now that you understand the three types of intermediaries, let’s review the advantages of the intermediation process.
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Major functions of financial intermediaries
As noted, financial intermediaries provide access to capital. However, in conjunction with increasing access to funds, through their ability to aggregate funds, intermediaries also reduce the transaction and search costs between lenders and borrowers.
By repurposing funds from savers to borrowers financial intermediaries are able to promote economic growth by providing access to capital. Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
Returning to the example of a bank used above, banks convert short-term liabilities (demand deposits) into long-term assets by providing loans; thereby transforming maturities. Additionally, through diversified lending practices, banks are able to lend monies to high-risk entities and by pooling with low-risk loans are able to gain in yield while implementing risk management.
Financial intermediaries bears risk on behalf of investors by investigating their savings across various sectors of business. They transform risk-by-risk spreading and risk pooling; they can spread risk across a range of institution. In turn institutions can pool risk by spreading investment across firms and various projects. Diversification allows a financial intermediary to allocate assets and bear risk more efficiently. Financial intermediaries do risk screening, risk monitoring and risk evaluation; it is more efficient for institution to screen investment opportunity on behalf of individuals than for all individuals to screen the risk. It helps individual saver to save time and money and offers low risk investment opportunity. One of the common example of this function is; a dollar deposited in a checking or savings account, it is not redeemed at less than a dollar but in turn one get paid interest on it over period of time. Therefore without financial intermediaries it would really have been difficult for individual investor to screen prospect borrower or investment opportunity, which would have discouraged individual savers from lending money and would have affected economical developments.
Modern world would not have been so efficient, aggresive and progressive without financial intermediation.
Ubechu Agatha Chidinma
2018/242441
dinmagatha@gmail.com
300 level
Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities. As such, financial intermediaries channel funds from people who have extra money or surplus savings (savers) to those who do not have enough money to carry out a desired activity (borrowers).
Against this background, clearly discuss how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk averse intermediaries help spread out and decrease risks.
A financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds, and stock exchanges. Financial intermediaries reallocate otherwise uninvested capital to productive enterprises through a variety of debt, equity, or hybrid stakeholding structures.
Financial intermediaries serve as middlemen for financial transactions, generally between banks or funds.
These intermediaries help create efficient markets and lower the cost of doing business.
Intermediaries can provide leasing or factoring services, but do not accept deposits from the public.
Financial intermediaries offer the benefit of pooling risk, reducing cost, and providing economies of scale, among others.
Financial intermediaries move funds from parties with excess capital to parties needing funds. The process creates efficient markets and lowers the cost of conducting business. For example, a financial advisor connects with clients through purchasing insurance, stocks, bonds, real estate, and other assets.
NAME : OGENYI,CHUKWUEBUKA FREDERICK
DEPARTMENT : ECONOMICS
REG. NO : 2018/241864
COURSE : ECO 324 ( FINANCIAL MARKET AND INSTITUTIONS)
ASSIGNMENT :
discuss how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk averse intermediaries help spread out and decrease risks
ANSWERS :
Meaning of financial intermediaries : A financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds, and stock exchanges. Financial intermediaries reallocate otherwise uninvested capital to productive enterprises through a variety of debt, equity, or hybrid stakeholding structures.
Through the process of financial intermediation, certain assets or liabilities are transformed into different assets or liabilities.As such, financial intermediaries channel funds from people who have surplus capital (savers) to those who require liquid funds to carry out a desired activity (investors).
A financial intermediary is typically an institution that facilitates the channeling 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, and eliminate the financial intermediary, which is known as financial disintermediation.
In the context of climate finance and development, financial intermediaries generally refer to private sector intermediaries, such as banks, private equity, venture capital funds, leasing companies, insurance and pension funds, and micro-credit providers. Increasingly, international financial institutions provide funding via companies in the financial sector, rather than directly financing projects.
1. How financial intermediaries helps in reconciling conflicting preference :
Reconciling conflicting preferences of lenders and borrowers
Risk aversion intermediaries help spread out and decrease the risks
Economies of scale – using financial intermediaries reduces the costs of lending and borrowing
Economies of scope – intermediaries concentrate on the demands of the lenders and borrowers and are able to enhance their products and services (use same inputs to produce different outputs)
Various disadvantages have also been noted in the context of climate finance and development finance institutions These include a lack of transparency, inadequate attention to social and environmental concerns, and a failure to link directly to proven developmental impacts.
Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
According to the dominant economic view of monetary operations, the following institutions are or can act as financial intermediaries:
1. Banks
2. Mutual savings banks
3. Savings banks
4. Building societies
5. Credit unions
6. Financial advisers or brokers
7. Insurance companies
8. Collective investment schemes
9. Pension funds
10. cooperative societies
11. Stock exchanges
According to the alternative view of monetary and banking operations, banks are not intermediaries but “fundamentally money creation” institutions, while the other institutions in the category of supposed “intermediaries” are simply investment funds.
2. How risk averse helps intermediaries help spread out and reduce risk :
Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
Molokwu Chiamaka Goodness
Economics
2018/242393
ASSIGNMENT
Reconciling conflicting preferences of lenders and borrowers- When using a financial intermediary one tends to have lower search costs as they don’t have to find the right lenders, you leave that to a specialist.
According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. This implies that financial intermediaries are middle participants in the exchange of financial assets.
Risk aversion- intermediaries help spread out and decrease the risks. Rather than lending to just one individual, you can deposit money with a financial intermediary who lends to avariety of borrowers – if one fails, you won’t lose all your funds
Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
According to Thompson (1982) financial intermediaries help to bridge the gap between borrowers and lenders by creating a market in two types of security, one for the lender and the other for the borrower. … This implies that financial intermediaries are middle participants in the exchange of financial assets.
Financial intermediaries are meant to bring together those economic agents with surplus funds who want to lend (invest) to those with a shortage of funds who want to borrow.[10] In doing this, they offer the benefits of maturity and risk transformation. Specialist financial intermediaries are ostensibly enjoying a related (cost) advantage in offering financial services, which not only enables them to make profit, but also raises the overall efficiency of the economy. Their existence and services are explained by the “information problems” associated with financial markets
Online quiz
Ezeilo Kanayochukwu Chimuanya
2018 /242412
1. A financial intermediary is typically an institution that facilitates the channeling 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, and eliminate the financial intermediary, which is known as financial disintermediation.
2. Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
Name: Kalu Melody Chinaza
Department: Economics
Registration number:2018/245127
An assignment on Eco 324
HOW FINANCIAL INTERMEDIARIES HELP IN RECONCILING CONFLICTING PREFERENCES OF LENDERS AND BORROWERS:
Financial intermediaries help in reconciling conflicting preference of lenders and borrowers in the sense that when using a financial intermediary one tends to have lower search costs as they don’t have to find the right lenders, you leave that to a specialist. The financial intermediary acts as the middle man ,so to speak, between the lenders and borrowers.
HOW RISK AVERSE INTERMEDIARIES HELP SPREAD OUT AND DECREASE RISKS:
it is important to note that financial intermediaries are able to create comparative advantages with respect to information acquisition and processing in relation to their sheer size in relation to the customer whereby they are able to manage risk more efficiently.
Intermediaries help spread out and decrease the risks in the sense that rather than lending to just one individual, you can deposit money with a financial intermediary who lends to a variety of borrowers – if one fails, you won’t lose all your funds.
NAME: MBA COLLINS CHIDUMEBI
REG NO.: 2018/242336
DEPARTMENT: ECONOMICS
COURSE: ECO 324 FINANCIAL MARKETS AND INSTITUTIONS
Discussion Quiz 2: Financial Intermediation
How Financial Intermediaries Help in Reconciling Conflicting Preferences of Lenders and Borrowers
One of the roles of financial intermediaries is to reconcile conflict of interest between lenders and borrowers. When loans are given out for say, a project, the lender cannot be sure that the borrower will put in enough work to make the project a success. If the borrower does not put any of his money into the project and the project fails, it is the lender not the borrower, who loses as the loan may not be repaid. Additionally, the borrower may have more information regarding the success of the project. These problems also tend to push up the user cost of capital, which increases the cost of borrowing for the borrower. These problems arise due to differences in the preferences of the lender and borrower and differences between information regarding the project, available to both parties (lender and borrower).
These problems between the lenders and the borrowers is also known as principal-agent problem. The lender will want to avoid the risk of losing his money; in the case of a failed project and the borrower will want to get the best possible terms of loan repayment. One way financial intermediaries-like banks- settle this conflict is to get the borrower to deposit some of his wealth into the project. This will ensure the alignment of the lender and borrower interest. Another common way to align lender and borrower preferences is the use of collateral as a requirement for loan disbursement. Here, what is required of the borrower is to set aside property that will be transferred to the lender, if the borrower defaults in repayment. By adopting these two simple measures, financial intermediaries are able to reconcile the conflicting preferences of lenders and borrowers.
How Risk Averse Intermediaries Help Spread Out or Decrease Risk
Financial intermediaries like insurance companies help spread out risk through a process called `Reinsurance`. Reinsurance occurs when different insurance companies buy insurance policies from other insurers so as to limit total loss in the event of widespread catastrophe. By this act of spreading risk, an insurance company is able to take on clients whose coverage will be too great for the company to handle alone. If one company assumes the risk on its own, the cost could potentially bankrupt or financially ruin the insurance company and may not cover the loss for the insured. Firms involved in reinsurance tend share the insurance premiums paid by the insured. The idea behind pooling risk or spreading risk is to ensure that no insurance company is too exposed to a catastrophic event or phenomenon.
Selling insurance coverage for the same risk in a single neighbourhood can cause financial problem if a local event results in massive number of claims. For instance, suppose a company sells flood insurance to homeowner s in a single area. If that region experiences a flood, they may be an immense number of claims which may overwhelm the finances of the insurance company. Hence, insurance companies should sell out insurance coverage for flood to homeowners living in different areas. So, in the event of a disaster they will be able to cover the claims made by those affected; by the premiums of those not affected by the occurrence.
Name: Ugwueze Martha Chioma
Reg No:2018/247847
Dept: Economics
Course code:Eco 324
Date:23/01/2022
Assignment
Clearly discuss how financial intermediaries help in reconciling conflicting preferences of lenders and borrowers and how risk averse intermediaries help spread out and decrease risks.
Answer:
Institutions, Markets, and Intermediaries
A financial intermediary is an institution that facilitates the flow of funds between individuals or other economic entities.
Review the purpose and types of financial intermediaries
Key Points
Financial intermediaries provide access to capital.
Banks convert short-term liabilities ( demand deposits ) into long-term assets by providing loans; thereby transforming maturities.
Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles.
pooling: grouping together of various resources or assets
financial intermediary: A financial institution that connects surplus and deficit agents.
A financial intermediary is an institution that facilitates the flow of funds between individuals or other economic entities having a surplus of funds (savers) to those running a deficit of funds (borrowers). Banks are a classic example of financial institutions.
Banks provide a safe and accessible environment for individuals and economic entities to deposit excess funds Additionally, banks also provide a service by packaging deposits into loans that are made available to economic agents (individuals and entities) in need of funds.
image
Banks are the most common financial intermediaries: Banks convert deposits to loans and thereby increase access to capital by serving as a financial intermediary between savers and borrowers.
Though, perhaps the most well-known of financial intermediaries, banks represent only one intermediary within a larger group. Other financial intermediaries include: credit unions, private equity, venture capital funds, leasing companies, insurance and pension funds, and micro-credit providers.
Major functions of financial intermediaries
As noted, financial intermediaries provide access to capital. However, in conjunction with increasing access to funds, through their ability to aggregate funds, intermediaries also reduce the transaction and search costs between lenders and borrowers.
By repurposing funds from savers to borrowers financial intermediaries are able to promote economic growth by providing access to capital. Through diversification of loan risk, financial intermediaries are able to mitigate risk through pooling of a variety of risk profiles and through creating loans of varying lengths from investor monies or demand deposits, these intermediaries are able to convert short-term liabilities to assets of varying maturities.
Returning to the example of a bank used above, banks convert short-term liabilities (demand deposits) into long-term assets by providing loans; thereby transforming maturities. Additionally, through diversified lending practices, banks are able to lend monies to high-risk entities and by pooling with low-risk loans are able to gain in yield while implementing risk management.
Role in Matching Savings and Investment Spending
Savings are income after-consumption and investment is what is facilitated by saving.
Explain the connection between savers and investors
Key Points
The marginal propensity to save (MPS), the percentage of after-tax income that an economic agent will choose to save.
Savings marketed by financial intermediaries, all consist of stocks, bonds, and cash balances, which in turn pay for the investment capital that increases productivity, efficiency and output of goods and services.
Financial intermediaries are a significant component to the transformation of savings into investment.
Key Terms
real interest rates: The rate of interest an investor expects to receive after allowing for inflation.
A popular national income accounting framework for discussing the economy is the GDP expenditure equation:
Y
=
C
+
I
+
G
+
(
X
−
M
)
, where
C
refers to consumption spending,
I
references investment spending,
G
is government spending, and
X
−
M
is net imports (
X
, exports;
M
, imports). Savings is defined as income that is not consumed.
C
is consumption. Investment,
I
, is made into capital (plant and machinery, also ‘ human capital ‘ – training and education), with intent to increase productivity, efficiency and output of goods and services.
I
can be generally defined as purchases of good that will be used to produce more goods and services in the future. In national accounting terms, stocks, bonds, mutual funds, and other cash equivalents, are not classified as investments but rather are classified as savings. Savings from this perspective facilitates capital purchase which are included in investments
Saving is what households (participants in the consumption account) do. The level of saving in the economy depends on a number of factors:
A higher real interest rates increases returns to saving.
Poor expectations for future economic growth, increase households’ savings as a precaution.
More disposable income after fixed expenditures (such as mortgage, heating bill, basic goods purchases) have been made increases saving.
Perceived likelihood of reduced return through regulation or taxation on savings will make saving less attractive.
Marginal propensity to save
The factors as stated affect the marginal propensity to save (MPS), the percentage of after-tax income that an economic agent will choose to save. The greater the MPS, the more saving households will do as a proportion of each additional increment of income. Stocks and bonds are considered to be important intermediary forms of savings as these get transformed into a capital investment that produces value.
image
Bonds are a type of savings: Savings are used to fund investments, where investments are defined as expenditures on factory plants, equipment and homes.
Savings and Investment
Assuming a closed economy, one where there is no export or impart activity to interfere with the domestic savings level, on an aggregate basis individual savings creates the supply of loanable funds available for investment purposes. The amount of savings available in the economy is equal to the amount of funding available for investment activity. The higher the level of savings, typically the lower the relative interest rate, ceteris paribus. On a macroeconomic theory basis, a higher the savings rate promotes business activity my lessening the cost of money and increasing risk taking activities to facilitate growth or production of goods and services.
Financial intermediaries can assist with increasing the incentive to save through developing financial products that offer ease of liquidation but provide a higher return than a savings account. In this manner, financial intermediaries are a significant component to the transformation of savings into investment. Mutual funds, pension obligations, insurance annuities, and other forms of savings marketed by financial intermediaries all consist of stocks, bonds, and cash balances, which in turn pay for the investment capital that increases productivity, efficiency and output of goods and services.
Role in Providing a Market for Loanable Funds
The loanable funds market is a conceptual market where savers (suppliers) and borrowers (demanders) are able to establish a market clearing.
the mechanics of the loanable funds markets
In the loanable funds market, market clearing is defined as the interest rate /loanable funds quantity where savings equal investment (the amount of capital needed for property, plant, and equipment based investments).
The interest rate is the cost of borrowing or demanding loanable funds and is the amount of money paid for the use of a dollar for a year.
Loanable funds are often used to invest in new capital goods. Therefore, the demand and supply of capital is usually discussed in terms of the demand and supply of loanable funds.
Key Terms
loanable funds: Money available to be issued as debt.
In economics, the loanable funds market is a conceptual market where savers (suppliers) and borrowers (demanders) are able to establish a market clearing quantity and price (interest rate). In the loanable funds market, market clearing is defined as the interest rate/loanable funds quantity where savings equal investment (the amount of capital needed for property, plant, and equipment based investments). Loanable funds are typically cash, but can also include other financial assets to serve as an intermediary.
image
Equilibrium in the loanable funds market: When the supply and demand for loanable funds are equal, savings is equal to investment and the loanable funds market is in equilibrium at the prevailing interest rate.
For instance, buying bonds will transfer savers’ money to the institution issuing the bond, which can be a firm or government. In return, the borrower’s (institution issuing the bond) demand for loanable funds is satisfied when the institution receives cash in exchange for the bond.
Loanable funds are often used to invest in new capital goods. Therefore, the demand and supply of capital is usually discussed in terms of the demand and supply of loanable funds.
Interest rate
The interest rate is the cost of borrowing or demanding loanable funds and is the amount of money paid for the use of a dollar for a year. The interest rate can also describe the rate of return from supplying or lending loanable funds.
As an example, consider this: a firm that borrows $10,000 in funds for one year, at an annual interest rate of 10%, will have to pay the lender $11,000 at the end of the year. This amount includes the original $10,000 borrowed plus $1,000 in interest; in mathematical terms, this can be written as $10,000 × 1.10 = $11,000.
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According to Thompson (1982) financial intermediaries help to bridge the
gap between borrowers and lenders by creating a market in two types of
security, one for the lender and the other for the borrower.
Financial intermediaries, through financial intermediation, allow funds to
be channeled from those that might not put them to use to those that would
put them to productive use. The general name for the services supplied by
financial intermediaries is financial intermediation. This implies that
financial intermediaries are middle participants in the exchange of
financial assets.
Financial intermediaries perform five functions:
1. Pooling the resources of small savers: banks for example, pool many
deposits and use these to make large items. Insurance companies collect
and invest many small premiums in order to pay fewer large claims.
Mutual funds accept small investment amounts and pool them to buy large
stock and bond portfolios.
2. Providing safekeeping, accounting, and payment mechanisms for resources:
Banks are obvious example for the safekeeping of money in accounts, keep
records of payments, deposits and withdrawals and the use of debit / ATM
cards and cheques as payment mechanisms.
3. Providing liquidity: Financial intermediaries can easily and cheaply
convert an asset to payment. They make it easy to transform various assets
into a means of payment through ATMs, cheques, debit cards etc.
4. Diversifying risk: Financial intermediaries assist investors diversify
in ways they would be unable to do on their own. Banks for instance spread
depositors’ funds over many types of loans, so that the default of any one
loan does not put depositors’ funds in jeopardy.
5. Collecting and processing information: Financial intermediaries are
experts at collecting and processing information in order to accurately
gauge the risks of various investments and to price them accordingly. The
need to collect and process information comes from a fundamental asymmetric
information problem inherent in financial markets.