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Financial Intermediaries - Essay Example

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Financial intermediaries as the term suggests, are people or organizations which help in the regulation of money in return for a share for themselves. For example, if a person wants a loan, he will go to a commercial bank to take it. But from where did the bank get the money to provide this loan to the customer Obviously from another customer who deposited this money earlier at some point due to any reason…
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Financial Intermediaries
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Financial Intermediaries Financial intermediaries as the term suggests, are people or organizations which help in the regulation of money in return for a share for themselves. For example, if a person wants a loan, he will go to a commercial bank to take it. But from where did the bank get the money to provide this loan to the customer Obviously from another customer who deposited this money earlier at some point due to any reason. This way, money flows from one hand to another via financial intermediaries. The article which is used to explain the whole structure of financial intermediaries is given in the references ( Kopcke, 2008)
There are many reasons for which these financial intermediaries are important for the local financial system. The most important one is security. As banks and other financial institutions playing this role have the proper expertise to handle the flow of cash and make sure that it is returned on a fixed time and date, they avoid any miscommunications and make sure that potential clients don't turn out to become criminals by not returning the loan. Therefore, by putting a saver's eggs in a safe basket, they ensure that they are not stolen. Secondly, as these financial intermediaries are properly qualified to do this particular task, they are also better able to judge to whom it is safer to lend a saver's money to. They keep an updated record of the types of customers who borrow from them and of their repayment schedules. This helps in making predictions about which type of customer is a better choice to do business of lending money.
The US Government's role is twofold in the economy. It has to look after the local and international intermediaries and as well as act as an intermediary itself. This is done by two separate governmental departments. The first is the SEC (Securities and Exchange Commission) and the second is the FDIC (Federal Deposit Insurance Corporation). The SEC basically handles the stock market of and the FDIC is responsible for the insurance of deposits at all commercial banks. The advantage of borrowing from the government directly is that borrowers get a lower interest rate while paying back the loan. This may not be a big deal for most businessmen because they need money quickly and prefer the extra services that loans with a higher markup offer but for the whole of the agricultural and housing industry, this involvement by the US Government is bliss. Leading an already below standard lifestyle and requiring money frequently, this system offers them relief.
The Federal Reserve is the crux of all this flow of cash. In basic terms, it is called the banker's bank. This means that banks can write checks to the Federal Reserve to make payments for them. It is like a large collection point for all the cash flowing in the economy. The cycle runs like this:
The saver deposits money in the bank. The bank sends the money to the Federal Reserve. From there the money is either loaned to someone directly from the Government or is sent back to a bank which it needs to give to a person it has granted the loan to.
This makes it easier for the government to monitor the whole cash flow system prevailing in the economy. Thus, all the cash that all banks have, ends up in the Federal Reserve.
References
1. Mervyn Lewis (1995) Financial Intermediaries. E. Elgar Financial Institutions
2. Richard W. Kopcke (2008) Safety and soundness of financial intermediaries: capital requirements, deposit insurance, and monetary policy. Retrieved May 16, 2008, from website http://findarticles.com/p/articles/mi_m3937/is_1995_Nov-Dec/ai_18035629
3. Robert Schenk. Financial Markets. Retrieved May 16, 2008, from website http://ingrimayne.com/econ/Financial/Overview8ma.html Read More
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