What is the purpose and function of the banking sector as a financial intermediary?
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Commercial banks play an important role in the financial system and the economy. As a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner. They provide specialized financial services, which reduce the cost of obtaining information about both savings and borrowing opportunities. These financial services help to make the overall economy more efficient. Show Imagine a World Without Banks One way to answer your question is to imagine, for a moment, a world without banking institutions, and then to ask yourself a few questions. This is not just an academic exercise; many former eastern-block nations began facing this question when they began to create financial markets and develop market-oriented banks and other financial institutions. If there were no banks…
How Banks Work Banks operate by borrowing funds-usually by accepting deposits or by borrowing in the money markets. Banks borrow from individuals, businesses, financial institutions, and governments with surplus funds (savings). They then use those deposits and borrowed funds (liabilities of the bank) to make loans or to purchase securities (assets of the bank). Banks make these loans to businesses, other financial institutions, individuals, and governments (that need the funds for investments or other purposes). Interest rates provide the price signals for borrowers, lenders, and banks. Through the process of taking deposits, making loans, and responding to interest rate signals, the banking system helps channel funds from savers to borrowers in an efficient manner. Savers range from an individual with a $1,000 certificate of deposit to a corporation with millions of dollars in temporary savings. Banks also service a wide array of borrowers, from an individual who takes a loan of $100 on a credit card to a major corporation financing a billion-dollar corporate merger. The table below provides a June 2001 snapshot of the balance sheet for the entire U.S. commercial banking industry. It shows that the bulk of banks' sources of funds comes from deposits - checking, savings, money market deposit accounts, and time certificates. The most common uses of these funds are to make real estate and commercial and industrial loans. Individual banks' asset and liability composition may vary widely from the industry figures, because some institutions provide specialized or limited banking services. Banks Are Only One Type of Financial Intermediary Finally, the U.S. financial services industry and financial markets are highly developed. In recent decades, many new products and services have been created, as well as new financial instruments and institutions. Today, in addition to banks, there are several other important types of financial intermediaries. These include savings institutions, credit unions, insurance companies, mutual funds, pension funds, finance companies, and real estate investment trusts (REITS). Banks' assets have grown in recent decades in absolute terms; however, banks have tended to lose market share to even faster growing intermediaries such as pension funds and mutual funds. Still, banks continue to account for a significant share-over 23 percent-of the assets of all financial intermediaries at the end of year 2000, as the chart below shows.  Let me also suggest some more advanced reading materials: What's Different about Banks--Still? Milton Marquis. Are Banks Special? A Revisitation. E. Gerald Corrigan. Personal Financial Education, FederalReserveEducation.org, 2003 The traditional role of a bank as a financial intermediary standing between a depositor and an e-borrower is still in tact but the quality and nature of such intermediation is changing. File Photo A financial intermediary is one that acts as a middleman between two parties in a financial transaction. The most common intermediary is a bank but the category also includes entities such as insurance companies, mutual funds, brokers, dealers and others. Traditionally a financial intermediary is one that connects surplus and deficit agents. In standard economics literature, financial intermediary is typically a bank that aggregates deposits from various sources and converts the funds into loans.The definition of a financial intermediary has expanded further in recent times to cover entities that were originally left out. For instance, home loan companies despite their intermediation function did not qualify. Some of the bigger ones, such as HDFC in India access funds directly in addition to getting facilities from banks. The categorisation of an institution into a financial intermediary is largely an academic function. For all practical purposes in countries such as India the terms financial intermediaries and banks have become interchangeable. The traditional role of a bank as a financial intermediary standing between a depositor and an e-borrower is still in tact but the quality and nature of such intermediation is changing. Some say it is an inevitable development propelled by among other things, technology and globalisation. Many others think that there is a strong case for banks to stick to their knitting -do what they know best and leave the rest to other more specialised agencies. Are banks becoming less relevant? This conflict between a generalist and a specialist takes place all the time and can never be resolved satisfactorily. The debate has deep implications for a bank’s human resources policies. Should we recruit specialist officers? What will be the implications for the rank and file? What career path are you promising for the youngster with special qualifications and so on? Such questions should resonate well with us in India. Very recently the government decided to fill up top positions in two public sector banks - Bank of Baroda and Canara Bank with those having substantial experience in the private sector. The hope however misplaced, is that seasoned private sector employees will bring a whiff of fresh air to the public sector culture. It might be far fetched but the government is basically reacting to the forces of disintermediation, forces that diminish a bank’s traditional role and move to new areas. Understanding disintermediation is easy, perhaps lots easier that understanding intermediation. Customers, both on liabilities side (depositors) as well as the assets side (borrowers) are prepared to say that the banker’s traditional middleman role is becoming less relevant for them. In other words, they are willing to meet directly shunning the traditional intermediation role. This has had enormous consequences not the least on bank profitability as well as on regulation. Among the important factors driving disintermediation is competition. Such competition has come from within the banking system as well as from the rest of financial sector. This is too vast a subject to dwell on but it is all too visible. For instance, Indian banks were not conditioned to take risks attendant on capital market investment. Yet the forces of competition, essentially from foreign banks forced many government banks to undertake activities they were neither qualified for nor experienced in. This is had disastrous consequences for many government banks as experiences of the infamous securities scam 1991-92 bear out. Most banks adopted new structures to do specialised activities such as merchant banks (investment banks) and leasing. The objective was as much as to develop specialised skills as to get past regulatory hurdles. — What are the purposes of financial intermediaries?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.
What would you say is the role of a bank as a financial intermediary What purpose does it serve?Yes, banks function as intermediaries connecting lenders and borrowers. They primarily collect funds from customers who want to deposit their surplus income and provide them with a return in the form of interest on the deposits.
What are the main functions purpose of a financial institution?Financial institutions are businesses that are formed to deal with financial and monetary transactions. These organizations primarily accept deposits, advance loans, make investments, and provide foreign exchange services.
What is the role of banks as financial intermediaries quizlet?Banks act as financial intermediaries because they stand between savers and borrowers. Savers place deposits with banks, and then receive interest payments and withdraw money. Borrowers receive loans from banks and repay the loans with interest.
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