by Justin Manucci

Created on: March 15, 2010

Financial intermediaries play a huge role in our economy, as there are many different types of financial intermediaries. The definition of a financial intermediary is an institution such as a bank, that borrow funds from people who have saved and then make loans to others who need money.

One “genre” of financial intermediaries would be known as depository institutions, which are basically financial intermediaries that accept deposits from individuals and institutions and make loans using that money, as mentioned earlier. An example of a depository institution would of course be a commercial bank. Commercial banks are what most of this country uses, and take in deposits for savings accounts, checking accounts, and time deposits, which have a fixed maturity date, such as a Certificate of Deposit or CD.  

Another example of a depository institution would be a credit union. These are typically smaller operations, and are designed for people of a specific group or membership, such as employees of a particular company. Credit unions primarily only make consumer loans, while commercial banks make consumer and corporate loans.

Another “genre” of financial intermediaries are investment intermediaries, which are basically finance companies, mutual fund companies, and money market accounts. Finance companies raise money by issuing stocks and bonds. They then lend these funds to consumers, who make typically large purchases with the funds.

A mutual fund company acquires funds by selling shares to many individuals and using the funds to purchase diversified portfolios of stocks and bonds. The advantage of mutual funds is that the investments are picked by professionals; they are very diverse so the risk is low, and there is potential for long term growth.

Money market mutual funds are sort of a combination of mutual funds and depository institutions, because they offer deposit style accounts. Money market accounts pay interest, but also function similarly to a checking account, as users are able to write checks or withdraw money from the account at any time. Money market accounts have become increasingly popular since their invention in 1971, although in recent times haven’t been paying much interest, similar to commercial banks and credit unions.

Investment banks are different than a lot of the other financial intermediaries, as they don’t loan funds that they take in through people’s savings. What an investment bank actually does, is help corporations in issuing securities. It first helps them decide what type of security they’d like to release, and then it helps them sell these, and takes a significant percentage of transactions it does for corporations.

Overall, these are the main financial intermediaries. Others include life insurance companies, pension funds and government retirement funds, and other types of insurance funds.

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