Question

What is the difference between Financial Intermediation and Maturity Transformation?

Answer 1

Solution.>

Financial intermediation is the method of moving amounts of money from economic agents with surplus funds to economic agents who would like to use those funds. The secret to understanding the mechanism and the variety of available financial instruments lies in the awareness that economic agents are a heterogeneous bunch with very different financial roles and needs.

Financial intermediaries, usually between banks or funds, function as intermediaries for financial transactions. Such middlemen help build efficient markets and decrease the cost of doing business. Intermediaries can provide services for leasing or factoring, but just don't accept public deposits. They  offer the benefit of risk pooling and cost cutting.

Maturity transformation is when banks take on short term sources of financing, such as saver deposits, and convert them into long-term borrowings, like mortgages.

Maturity transformation is financial institutions' method of borrowing funds in shorter time periods than they lend out. The impact of maturity transition on financial markets is also that investors such as bondholders and shareholders will sell their shares and bonds on the secondary market.

The company can therefore be a long term borrower from a short-term lender market. The short term borrowers are actually buying and selling the ownership of the shares or bonds on the stock exchange. The company maintains a list of owners and updates the name if there is a sale.

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