Q:

What are the economic functions financial intermediaries perform?

A:

Quick Answer

Financial intermediaries provide payment mechanisms for resources, diversify risks and keep money safe in financial accounts, according to State University of New York-Oswego. Financial intermediaries provide information to customers and investors that leads to decisions based on risks of investments.

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Full Answer

Examples of financial intermediaries include mutual funds, insurance companies, banks, credit unions and financial advisers, notes Economic Help. These organizations, groups and firms help customers save, borrow and invest money in a variety of ways. Insurance companies spread out the risks of default by insuring entities with little to no risk that cover for those with more risk. Financial advisers disseminate information to their customers, which leads the advisers' customers to invest money properly.

Financial intermediaries pool resources of small savers to create larger investments. Someone who wants a $100,000 loan for a house cannot approach 1,000 individuals for $100 each. A loan officer of a bank can ascertain a person's ability to repay a loan. Financial intermediaries provide liquidity by taking short-term gains and turning the assets into long-term profits, according to SUNY-Oswego. For instance, fees from a bank's ATM usage are collected and then invested in six-month bonds with a greater return on interest.

Financial intermediaries screen customers for risk, monitor the viability of loans, collect collateral from defaulted loans and disclose information that help customers make good choices. These groups and organizations try to make good financial decisions for their customers, notes SUNY-Oswego.

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