A financial intermediary is an institution or individual that serves as a "middleman" among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, insurance and pension funds, pooled investment funds, leasing companies, and stock exchanges. The financial intermediary thus facilitates the indirect channeling of funds between, generically, lenders and borrowers. That is, savers (lenders) give funds to an intermediary institution (such as a bank), and that institution gives those funds to spenders (borrowers). When the money is lent directly - via the financial markets - eliminating the financial intermediary, this is known as financial disintermediation.

Economic function

Financial intermediaries, as outlined, essentially, channel funds from those who have surplus capital (savers) to those who require liquid funds to carry out a desired activity (investors). Financial intermediaries thus reallocate otherwise uninvested capital to productive enterprises. In doing so, they offer the benefits of maturity and risk transformation. In other words, through the process of financial intermediation, assets or liabilities may be transformed into assets or liabilities with (very) different risk and payment profiles. The prevalence of these intermediaries, relative to disintermediated transactions, is explained in that specialist financial intermediaries ostensibly enjoy a cost advantage in offering financial services; this not only enables them to make profit, but also raises the overall efficiency of the economy. Their existence and services are then explained by the "information problems" associated with financial markets.

Functions performed by financial intermediaries

The hypothesis of financial intermediaries adopted by mainstream economics offers the following three major functions they are meant to perform:

Advantages and disadvantages of financial intermediaries

There are two essential advantages from using financial intermediaries: The cost advantages of using financial intermediaries include: Various disadvantages have also been noted in the context of climate finance and development finance institutions. These include a lack of transparency, inadequate attention to social and environmental concerns, and a failure to link directly to proven developmental impacts.

Types of financial intermediaries

According to the dominant economic view of monetary operations, the following institutions are or can act as financial intermediaries: According to the alternative view of monetary and banking operations, banks are not intermediaries but "fundamentally money creation" institutions, while the other institutions in the category of supposed "intermediaries" are simply investment funds.