Question

1. what are the four elements of financial intermediaries . the definition of each and provide examples of each

Answer 1

Financial intermediaries exist because there is a conflict between lenders and borrowers in terms of their financial requirements (term, risk, volume, etc.). The financial intermediaries solve these divergent requirements by (for example) investing in the instruments of debt of government with the short-term funds of the household sector invested with them.

Four elements of Financial intermediaries are:

1). The ultimate lenders (surplus economic units) and borrowers (deficit economic units), i.e. the non-financial economic units that undertake the lending and borrowing process. The ultimate lenders lend to borrowers either directly or indirectly via financial intermediaries, by buying the securities they issue.

2). Financial instruments (or assets), which are created/issued by the ultimate borrowers and financial intermediaries to satisfy the financial requirements of the various participants. These instruments may be marketable (e.g. treasury bills) or non-marketable (e.g. retirement annuities).

3). The creation of money (bank deposits) by banks when they satisfy the demand for new bank credit. This is a unique feature of banks. Central banks have the tools to curb money
growth.

4). Financial markets, i.e. the institutional arrangements and conventions that exist for the issue and trading (dealing) of the financial instruments. Eg. Securities ie. Stock, bonds, sharers and dentures, etc.