Question

In a financial system, funds flow from the primary savers to the ultimate borrowers. Discuss the two main approaches through which this may be achieved. Further, explain the specific role financial intermediation plays in this process?

Word Count:?2,500 maximum

Answer 1

The two main approaches for flow of funds from primary savers(household) to ultimate borrrowers(corporate) are

1. Brokerage function

2, Asset transformation

Brokerage function

The brokerage function can benefit both savers (households) and users of funds(corporates) FIs may provide only transaction services, such as discount brokerages, or they also may offer advisory services which help reduce information costs, such as full-line firms like Merrill Lynch.

Asset transformation

The asset transformation function is accomplished by issuing securities of corpoates such as deposits and insurance policies that are more attractive to household savers, and using the proceeds to purchase the primary securities of corporations. Thus, FIs take on the costs associated with the purchase of securities.

Role of financial intermediation is that there are certain financial institutes which act as a middleman to facilitate the flow of funds from promary savers to ultimate borrowers.

Some of financial institutions are

commercial banks, investment banks, stockbrokers, pooled investment funds, and stock exchanges.