Explain concept of financial intermediation

Course:- Financial Management
Reference No.:- EM13160905

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1. Explain concept of financial intermediation. How does the possibility of financial intermediation increase the efficiency of the financial systems?
2. Why is denomination divisibility an important intermediation service to the typical household?

3. Why are economies of scale important to the viability and profitability of financial intermediaries?

4. Explain the differences between the money markets and the capital markets. Which market would General Motors use to finance a new vehicle assembly plant? Why?

5. What is the prime rate? Why do some banks make loans below the prime rate?

6. What do we mean by "off-balance-sheet" activities? If these things are not on the balance sheet, are they important? What are some off-balance-sheet activities?

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Financial intermediary is a medium to connect the two parties in a financial transaction. Prominent examples of financial intermediary are Banks, insurance companies, Mutual funds, pension funds etc. When one person doesn’t want or doesn’t have the option to transact with another individual directly then he executes the transaction with help of intermediary.

For example if A wants to borrow money but he could not find anybody to lend him then he can borrow money from Bank. Bank is an intermediary who takes the money from those who want to deposit and lend to those who want to borrow without connectine each other individually. Financial intermediation is very much essential for efficient of financial system. It gives liquidity and assurance.

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