Functions Performed By Financial Intermediaries
Financial intermediaries provide 3 major functions:
- Maturity transformation
- Converting short-term liabilities to long term assets (banks deal with large number of lenders and borrowers, and reconcile their conflicting needs)
- Risk transformation
- Converting risky investments into relatively risk-free ones. (lending to multiple borrowers to spread the risk)
- Convenience denomination
- Matching small deposits with large loans and large deposits with small loans
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