7/17/2019 FINACIAL AND BANKING.docx

http://slidepdf.com/reader/full/finacial-and-bankingdocx 1/1

1. Explain the Main Reasons Why Financial Markets andFinancial Intermediaries Exist.

Explain the main reasons why financial markets and financial intermediaries exist.

Why are banks special? A bank is a financial intermediary that offers loans and deposits, and payment services. In

the past decade the banks have become a very important part of the economy. Banks are financial intermediaries,

financial intermediaries and financial markets main role is to provide a system by which funds are transferred and

allocated to their most productive opportunities. Banks need money and they et the money from people who invest

in the bank and people who save their money in the bank, but the money does not stay in the bank it has to be

allocated to people or companies with deficit funds !borrowers". In doin so they increase the economic efficiency by

promotin a better distribution of resources.

#ow can the transfer of wealth from surplus units to deficit units occur?

$here are two ways that the transfer of wealth can happen its either direct finance or indirect finance. %irect finance is

the transfer of funds from surplus units to deficit units via financial markets. Indirect finance on the other hand has a

different procedure as the transfer of funds does not occur directly from lender to borrowers as the financial

intermediaries step in.Why is there a need for financial markets and why do they exist?

&inancial 'arket exists in order to facilitate the relations between providers of capital such as savers and investors

and users of capital such as companies and overnment .A &inancial 'arket exists to allow transaction with mutual

benefit to take place between both parties. It exists in order for investor and investment seeks to conduct business

easily.

$he financial markets provide both the buyer and the seller with a fair evaluation of the asset that they are buyin or

sellin this is known as the pricin function. $he financial markets are also reulated this means that reulation

encouraes issuers of securities !borrowers" not to take on.