CAT / FIA FFM Syllabus C. Managing Cash Balances - Benefits of financial intermediation - Notes ^{4 / 13}

These are:

1. Value transformation

   Borrowers may require large sums of money. 

   Financial intermediaries can pool together many smaller deposits and lend a smaller number of large amounts of money to borrowers.

2. Maturity transformation

   Depositors may only want to deposit money in the short term, or retain a level of liquidity. 

   Borrowers may want to borrow money over a long period of time. 

   By dealing with many customers over a long period of time, financial intermediaries can provide long-term funds to borrowers, whilst ensuring that depositors retain the level of liquidity they require.

3. Reduction in transaction costs

   Financial intermediaries can reduce the transaction costs associated with, for example, writing contracts for borrowers and lenders.

4. Risk diversification for savers

   If a borrower defaults on a loan, the savers should not be directly affected as the cost will be charged to the financial intermediary, not the depositors.

   The return on an individual’s savings are not reliant on the performance of one borrower.

5. Expertise

   Financial intermediaries have the specialist knowledge and resources to assess the risk and anticipated profitability of proposed projects, so reducing the risk to the lenders.

6. Ease of borrowing

   Borrowers do not need to visit many banks to secure funding, but visit one financial intermediary.