Corporations that receive savings and investment funds from individuals and invest them in capital market securities.
Types of financial intermediary
Financial intermediaries include:
* Banks
* Building societies
* Credit unions
* Financial advisers or brokers
* Insurance companies
* Collective investment schemes
* Pension funds
Financial intermediaries perform five major functions[4]:
(1) they facilitate the acquisition of payment for goods and services, e.g. through the use of cheques;
(2) the financial system provides economies of scale and economies of scope that allow an individual to invest in a portfolio of assets, which would be much more difficult in the absence of financial intermediaries;
(3) they ease the liquidity constraint on households and firms which arises when the liquidity available for certain purchases is at variance with the immediate flow of income available; e.g. the use of mortgages allows households to purchase homes today instead of thirty years from now when they have saved up enough money to pay for it;
(4) they allow for the spreading of risk e.g. bank loans spread the costs over all customers in the event of default;
(5) they can reduce the risk of moral hazard and adverse selection created by the information asymmetry that exists between lender and borrower (the lender usually has incomplete information about how the borrower will use the money loaned) because financial intermediaries can develop expertise in things like monitoring borrowers' activities and market conditions.
