What kind of person is this - financial intermediary? What does he do? What is the specificity of his work? Can an organization act as an intermediary? We will talk about this and other aspects in the framework of this article.
general information
In cases where a market entity or even a whole sector of the economy does not have sufficient financial resources to pay for the planned expenses, you can proceed as follows:
1. Reduce spending.
2. Work on increasing cash income.
3. Borrow money from other facilities or sectors.
Along with this, there are commercial structures, individuals, and even government organizations that have more money than they need. Therefore, summing up, we can say that there are two categories of objects:
1. Possessing excess.
2. Having a deficit.
It should be noted that financial intermediation is not included in other groups of types of economic activity, and therefore it is considered separately at both the legislative and private levels.
What to do in this situation?
There is a concept of “financial intermediation” in the State OKVED. Briefly explained, those who have excess cash are their suppliers. Owners of the deficit are turning into consumers. These two groups are better known as lenders and borrowers. A subject or sector of the economy can simultaneously be both the owner of a deficit and an excess. True, no matter what the general situation, both types of activity can be carried out simultaneously. But when compiling state statistics, the division into black and white is carried out. At the same time, financial intermediation is engaged in the redistribution of available funds within the framework of the economic system.
What is it?
Financial intermediation is a full-fledged economic institution. Its task is to ensure communication between borrowers and lenders. Intermediaries take money from the latter and provide them first. And this is all at interest. It should be noted that the amount of funds accumulated by financial intermediaries significantly exceeds those that pass through other sectors of the economy. As a reward for these services, a certain percentage is taken.
By the way, financial intermediaries even exist between institutions. Let's look at a small example of such an amazing design. Let's say that in the Russian Federation there is a bank “Deposits and loans”. He wants to provide his services to clients throughout the globe. But, alas, he does not have the necessary infrastructure. Then he concludes an agreement on the provision of intermediary services with the bank "The largest financial institution in the world." And when a client wants to transfer funds from the Russian Federation to Poland, where “Deposits and loans” do not have a representative office, a partner is connected to this operation. Although, of course, this is not the only option for such mutually beneficial cooperation.
About the pitfalls
Initially, it may seem that financial intermediation does not make sense. Indeed, it is much more profitable for both the borrower and the lender to act directly. But in a developed economy, this logic does not work. The fact is that now the accumulation and redistribution of free cash is an entire industry for which a considerable infrastructure is working.
Let's look at a small example. There is an enterprise in Perm.It successfully makes money and holds part of the funds in its deposit account, since this is a reserve of two hundred thousand rubles. In fact, they are at the bank. A girl lives in Yaroslavl who wants to repair her apartment. To do this, she needs two hundred thousand rubles. She goes to the bank and asks for a loan. The financial institution looks at the girl's income, her credit history and decides to satisfy the request. At the same time, six percent per annum drops on the deposit, while the loan will be issued at twenty.
Of course, this example is very exaggerated and simplified, but it allows you to understand the mechanism. The company does not spend money, because it needs a reserve. And if there is an opportunity, albeit partially, to compensate for the losses from inflation, then why not take advantage?
The girl wants to live in better conditions and gets the opportunity. And the bank takes fourteen percent of the amount provided as a fee for its services. This is how accumulation and redistribution of available funds works. Now let's talk about specific benefits.
For lenders
Financial intermediation in this case can reduce credit risk. It is unlikely that for anyone there is a secret that in modern market conditions there is a high chance of non-repayment of both the principal amount of the loan and interest. Financial intermediation services allow diversification of risk due to its distribution to a significant number of loans issued.
Remember, earlier it was said about the rather large profit of the bank in the form of fourteen percent? Real indicators on the territory of the Russian Federation are very close to this, because such risks are laid in them. At the same time, wages for employees, taxes and so on are also taken into account. In addition, contacting financial intermediaries makes it easier to find a reliable borrower. After all, it was banks and other similar structures that were assigned the role of checking the solvency of borrowers and organizing the distribution of services. This reduces credit risk, as well as costs.
Why carry money on deposit?
And another important aspect - the financial intermediation of the bank contributes to the resolution of liquidity problems that may arise with economic agents. In other words, unimpededly fulfill all the obligations that have been taken to counterparties. What is the given mechanism? For such cases, financial institutions hold a certain portion of their assets in cash. This is facilitated by both an internal desire to develop, and legislative regulation.
So, the state obligated banks to have certain minimum guarantee amounts. If memory serves, then for investment banks in the Russian Federation this figure is 180 million rubles. Also, certain amounts should be at the box office. As you can see, financial intermediation is an important structural element of the modern economy.
For borrowers
The financial intermediation market is also useful for those seeking funds. First of all, the availability of such an opportunity allows you to take loans on acceptable terms. Financial intermediaries collect data on borrowers, determine the level of reliability and offer an appropriate level of interest rate. Moreover, the better things go with the applicant, the more pleasant conditions he will be offered. This point is explained by the fact that the presence of financial intermediaries reduces the risk for primary lenders.
We should not forget that the presence of financial intermediaries allows you to work according to a standardized scheme, which simplifies the coordination of working moments such as the timing of the provision and amount of funds. Why is it important? The fact is that borrowers need funds, as a rule, for a longer time than lenders are ready to provide. The presence of intermediaries allows you to transform this situation and fill the gap.Since large amounts are accumulated from many customers, it is also possible to satisfy the demand for large loans from borrowers.
Specificity of the object of consideration
It should be understood that there are not only banks, but also other financial intermediation. OKVED will give a full picture of this. As finishing touches, I would like to note the fact that under specific economic conditions (for example, during a crisis period) financial intermediaries sharply lose their role. If this process acquires a mass character, the phenomenon of disintegration occurs. This is the name of the collapse of the financial intermediation system when the transition to direct lending is carried out. This process can have truly devastating consequences. It affects the financial system and markets. And it’s good if it costs only one country.
How can one not recall the crisis that began in the USA at the end of 2007 and proved to be fully in 2008. Then it all started with immoderate housing lending and weak control in the pursuit of profit. It would seem that the answer is simple - to strengthen supervision. But not so simple. The fact is that such situations arise as a result of an imperfect financial policy. And here both kinks and a soft attitude are equally dangerous. What connivance leads to, we can see. But the establishment of a ceiling for bets, an overestimation of the reservation rate or even a ban on certain operations may lead to higher prices, which will lead to an overpayment.
Conclusion
Of course, the institution of financial intermediaries is imperfect. There are many complaints to him. Very often, no one pleads guilty to creating crisis situations, and everyone avoids paying with the additional placement on the neck of ordinary taxpayers of significant amounts to which they have nothing to do. Well, perhaps in the future they will come up with something more perfect, but now, without this institution, the modern economy cannot function.