Financial Intermediaries

Financial intermediaries are common across the entire financial world. A financial intermediary is an institution that borrows money from people who have saved and in turn makes loans to others, acting as a middleman between investors and firms raising money. Common institutions that conduct the intermediary actions are commercial banks, credit unions, insurance companies, mutual funds, and finance companies. These institutions are an integral part to the overall health and functionality of the world financial market.

Functions performed by financial intermediaries can be categorized into three functions; (1) maturity transformation, (2) risk transformation, and (3) convenience denomination. With maturity transformations, intermediaries convert short-term liabilities to long term assets. This conversion is common with banks and other institutions that provide liquidity for entrepreneurs, giving a short term debt a match with a long term loan. Rather than constantly evaluating short term loan options and rolling over the debt balance, a longer term commitment is able to be made that locks in a lower rate to benefit all parties. Additionally, intermediaries can provide risk transformation, which offer the ability to convert risky investments into relatively risk-free by lending to multiple borrowers to spread the risk. By pooling the funds of multiple investors, the intermediary – such as a mutual fund – inherently provides diversification and tolerance against a single investment producing undesirable results. Finally, convenience denomination is provided by an intermediary. With a large quantity of deposits being held at a financial intermediary, they are able to match small deposits with large loans, and larger deposit...

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... the economy as a whole; it keeps the cycle of money flowing, investing in companies to fuel growth. When an intermediary grows as large as Berkshire ($113 billion market cap), caution must be placed on where the money is flowing. It can be easy for the intermediary to flirt with becoming a monopoly on certain markets or sectors due to the influx of investments and percentage of ownership. During an economic rebound, it is often easy to follow large intermediaries and expect them to “turn the tide” and drag the economy out of the slump. The danger arises when people begin to expect the silver bullet approach and start to focus solely on these large institutions; having this tunnel vision does not always allow for the fastest growth and/or recovery. Overall, with all aspects considered, Berkshire Hathaway as an intermediary is beneficial to the overall economy.