Financial intermediation refers to borrowing by economic deficit units from financial institutions in preference to borrowing directly from economic surplus units.
Keppel Ltd. 1Q 2024 Business Update Presentation Slides
The principle of intermediation.ppt copy
1. The Principle ofThe Principle of
Intermediation and theIntermediation and the
Role of FinancialRole of Financial
InstitutionsInstitutions
2. The Principle of IntermediationThe Principle of Intermediation
Financial intermediation refers to borrowing by
economic deficit units from financial institutions
in preference to borrowing directly from
economic surplus units.
Funds are transferred from economic surplus units
(lenders) to economic deficit units (borrowers),
termed indirect finance since it involves a
financial intermediary that stands between
savers and the borrowers and helps in the
transfer of funds from one economic unit to the
other.
3. The process of indirect finance using financial
intermediaries,
termed financial intermediation, is the
principle means for transferring funds from
economic surplus units to economic deficit
units.
The Principle of IntermediationThe Principle of Intermediation
4. Role of Financial IntermediariesRole of Financial Intermediaries
in Financial Marketsin Financial Markets
Financial intermediaries are mainly
concerned with recycling funds from
economic surplus units to economic deficit
units.
Like financial markets, financial intermediaries
have two tasks:
Matching savers and borrowers.
Providing risk-sharing, liquidity, and
information services.
7. Deposit institutions are popular because:
Deposits are liquid
They customize loans
They accept the risk of loans
They have expertise in evaluating
creditworthiness
They diversify their loans
8. Savings institutions
Include building societies and savings banks
Are mostly owned by depositors y y p (mutual)
Concentrates on residential mortgage loans
Credit unions
Are nonprofit institutions
Restrict their business to credit union members
Tend to be much smaller than other deposit institutions
9. Role of Nondepository financial
institutions
Nondepository institutions generate funds from
sources other than deposits
Finance companies
Obtain funds by issuing securities
Lend funds to individuals and small business
firms
10. Mutual funds
Sell shares to surplus units
Use funds to purchase a portfolio of securities
Some focus on capital markets securities (e.g., stocks or
bonds)
Money market mutual funds concentrate on money
market securities
11. Hedge funds
Use funds to purchase a portfolio of securities (e.g., stocks, bonds,
options and futures contracts)
Securities firms
Broker function
Execute securities transactions between two parties
Charge a fee in the form of a bid-ask spread
Investment banking function
Underwrite newly issued securities
Dealer function
Securities firms make a market in specific securities by adjusting
their inventory
12. Insurance Companies
Provide insurance policies to individuals and firms in
for illness, damage to return death, and property
Charges premiums
Term insurance policies
Whole of life insurance policies
Endowment policies
Annuities
Invest in stocks or bonds issued by corporations