1 Financial Intermediaries
Financial intermediaries— Organisations in the debt market which bring together potential lenders and potential borrowers.
The following financial institutions act as financial intermediaries:
Commercial banks and building societies (i.e. deposit takers).
Investment banks—which provide banking services to corporate clients, including advice on areas such as share issues and acquisitions.
Insurance companies—which can invest much of their premium income in long-term assets, as their outgoings are reasonably easy to predict.
Investment trusts and unit trusts/mutual funds—which attract investors and then reinvest the funds raised into other companies.
Pension funds—which have predictable cash outflows and can invest in the long term.
Finance companies—which provide business and domestic credit, lease finance and factoring/invoice discounting services. These companies are often a subsidiary of another financial institution.
Discount houses—which trade in investments such as bills of exchange.
2 Role of Financial Intermediaries
Financial intermediaries are important as they carry out the following roles:
Aggregation—small deposits are combined and lent to large borrowers.
Maturity transformation—a continuing stream of short-term deposits can be used to lend monies in the long term.
The risk of each particular borrower is effectively spread across many lenders.
Providing a liquid market with flexibility and choice for both lenders and borrowers.
Providing instruments to business for hedging risk (e.g. forward contracts, options and swaps).
3 The Money Market
The money market is not actually a physical market but is the term used to describe the trading between financial institutions.
The main areas of trading include:
The discount market—where Bills of Exchange are traded.
The inter-bank market—where banks lend each other short term funds.
The Certificate of Deposit market—a CD is a savings certificate entitling the holder to receive interest. A CD states a maturity date, a specified fixed interest rate and can be issued in any denomination.
The Eurocurrency market—where banks trade in foreign currencies, usually in the form of Certificates of Deposit.
The inter-company market—where companies lend directly between themselves.
The commercial paper market.
These markets are for short-term lending and borrowing where the maximum term is normally one year.
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