Essay on The Major Risks of Financial Intermediaries

Essay on The Major Risks of Financial Intermediaries

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The Major Risks of Financial Intermediaries

A financial intermediary is an establishment or an institution which
acts as a third party between investors and firms in trying to obtain
funding. A general explanation would be the instance of a saver who
has extra money and a borrower who needs this extra capital. A typical
example of a financial intermediary is a bank, but there are more such
as life insurance companies and building societies. This essay will
assess the risks which financial intermediaries face and how they
manage them.

It is important to note that financial intermediaries do not use their
own money instead they use the money of its depositors. To give a
simple example of how a bank would act as a financial intermediary.
Banks receive funds for depositors and while they keep a percentage in
of this cash in reserve in case they want it back they lend a large
percentage of it out or purchase bonds.

Financial intermediaries generally provide four important services.
The first one is expert advice; they can provide the best information
for investing customer funds and alternative methods of obtaining
finance. The second service is that they provide expertise in
channelling funds; they can provide specialist advice on areas to
channel funds to yield high results. The third service is maturity
information this is where the banks who have many depositors borrow
small amounts from each one so they are able to provide long term
loans. The final area which this essay will pick up on is the risk
transformation. This service provides the know how of how to allocate
loans and money to other money at the least possible risk to...

... middle of paper ...

...he world is
being introduced to the likes of global terrorism and the heinous
attacks of the worlds largest financial capital on September 11th
there was an increased reason to protect themselves form risks from
insider factors and now new deadly outsider factors. When you are in a
high risk market playing with large amounts of other people’s money to
make a financial system work there can never be no risk. As the
financial world gets to grips with new threats and risks it makes sure
that it has some ways of protecting itself. I would like to end this
essay with a quote "Take calculated risks. That is quite different
from being rash. Do not fear risk. All exploration, all growth is
calculated. Without challenge people cannot reach their higher selves.
Only if we are willing to walk over the edge can we become winners."

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