Advantages of Financial Intermediaries
There are 2 essential advantages from using financial intermediaries:
- Cost advantage over direct lending/borrowing
- Market failure protection the conflicting needs of lenders and borrowers are reconciled, preventing market failure
The cost advantages of using financial intermediaries include:
- Reconciling conflicting preferences of lenders and borrowers
- Risk aversion intermediaries help spread out and decrease the risks
- Economies of scale using financial intermediaries reduces the costs of lending and borrowing
- Economies of scope intermediaries concentrate on the demands of the lenders and borrowers and are able to enhance their products and services (use same inputs to produce different outputs)
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