Bank as a Financial

Intermediaries

What is Financial Intermediaries ?

It is a Financial Institution that acts as the bridge between investors or savers and borrowers or security issuers which issue their own financial instrument called secondary instrument.

Investors or Savers or a Depositor.

(Surplus units or SUs)

Primary SecuritiesA bank gets deposits from the depositor.The depositor is the lender and the bank is the borrower.Original borrowers(Bank) issue PRIMARY SECURITIES

Lender

DIRECT FINANCE

•The relationship or a transaction between the bank and the depositor is Direct finance.

Borrowers or Security issuers.(Deficit units or DUs)

Secondary Securities

The transaction between the bank and the borrower called “ Secondary Securities”

Loan

INDIRECT FINANCE

The borrowers from the bank now have an indirect relationship to the depositor.

Primary SecuritiesSurplus units or

SUsDirect finance

Secondary Securities

Deficit units or DUs

Indirect finance

The Relationship (Transaction)

depositor borrower

Financial Intermediary

Financial Intermediaries 3 major functions

Maturity of insurance policy, reach the end of its term and so become payable.

Risk transformation. Converting riskly investment into relatively risk-free ones.

Convenience denomination. Matching small deposits with large loans and large deposits with small loans.

Bank as a Financial Intermediaries

Can create secondary securities that it can sell. Such as:

*Funds *Investments Banks *Entities

Can pool deposits to have a bigger amount available to be sold as a secondary security.

Can simply lend accumulated deposits to borrowsers as a loan.

Banks get deposit from the depositors.

Bank that consolidates deposits and uses funds to transform them into loans.

Examples of Financial Intermediaries in Banks

Depository Institution Refers to financial institution that

accepts deposits from surplus.

Issues checking or current account, savings and time deposits and help depositions with money market placement.

Current or checking account can be withdrawn by issueing a check.

Depository Institution includes:

Commercial Banks

Grant only short-term loans.

Originally extended to merchants for the transport of their goods in both the domestic.

Ex: *Ordinary Bank *Expanded Commercial/Universal Bank.

Thrift Banks

a. Savings and mortgage banks.

b. Private development banks.c. Savings and loans

associations.d. Microfinance thrift banks.e. Credit unions.

Other Functions of a Bank as a Financial Intermediaries.

Provide safekeeping and accounting services, as well as access to the payment system.

Supplying liquidity by correcting saver’s balances directly into means of whenever needed.

Provide ways to diversity risks.

Collecting and processing information costs.

Advantages and Disadvantages of Financial Intermediaries in Banks.

AdvantagesCost advantages over direct

lending/ borrowing

Market failure protection the conflicting needs of lenders and borrowers and reconciled, preventing market failure.

Disadvantages

Lack of tranparency.

Inadequate attentions to social and environmental concerns.

A failure to link directly to proven developmental impacts..