Financial Intermediation generally consists of the following players:
- Savers- Surplus sectors of economy (typically households)
- Borrowers - Deficit sectors of the economy (non-savers)
- Economy as whole; borrowers borrow what savers save: SAVINGS = INVESTMENT
- Financial assets held by savers must always equal borrowers liabilities.
- Financial Intermediaries (Banks, investment firms, or other financial institutions) pool the savings of many people and lend to worthwhile borrowers.
Some Benefits of Intermediation:
- Life cycle model of consumption - showes typical consumption and saving patterns in life.
- Due to economic of SCALE (amount) and SCOPE (size), financial intermediaries match savers to borrowers efficiently and effectively and:
1) Earn good return
2) Contribute importantly to economic growth
Difficulties of lending for an individual:
1) cost of locating borrower
2) Obtain credit history
3) Rish of default makes diversification necessary
[tags]financial intermediation, intermediation[/tags]