Understanding Financial Intermediaries and Their Role
The Financial System
The financial system of a country consists of the set of institutions, financial assets, and markets, with the purpose of channeling the savings created by the spending units with surplus units to deficit spending.
Financial Intermediaries
Financial Intermediaries are the set of specialized institutions in mediating between lenders (who lend money because they have a surplus) and borrowers (who can apply for loans because they have deficits).
Types of Financial Intermediaries
Bank Financial Intermediaries
Central Banks and banking entities. They have the ability to create money.
The Central Bank
The Bank of Spain, following the entry into the Economic and Monetary Union (EMU), only has functions delegated by the European Central Bank (ECB):
- Manage the monetary policy designed by the ECB.
- Supervise credit institutions that exist in Spain and ensure stability in the Spanish financial system.
- Bank of banks.
The Banks
They take in deposits and lend to the private sector (firms and households) and the public sector.
The services offered by banks:
- Deposits:
- Sight Deposits: These are current accounts and have immediate availability.
- Savings Deposits: These are savings accounts. Unable to check availability.
- Term Deposits: Impositions are to run and not be withdrawn without a penalty.
- Transactions: These are the services that banks provide to their customers. They consist mainly of accepting checks and money orders to transfer from one account to another.
- Loans: Loans are granted to customers who need financing. The banks allow customers to have overdrafts, i.e. without having to have money (credits). In this particular type of loan, high-interest rates are often imposed.
- Safety Deposit Boxes: Banks have safety deposit boxes in which individuals can deposit their valuables.
- Other Services:
- Financial advice.
- Foreign currency exchange.
- Pension plans.
Non-bank Financial Intermediaries
These intermediaries do not create money. Their financial assets are not money.
- Insurers: Assets are insurance policies. The policy covers customers in the event of an accident. In exchange, they charge a price called a premium. These companies invest the premiums in other financial asset products pending an incident.
- Companies and Investment Funds: A group of entities or persons setting up a fund to invest it, which is managed by a management company.
- Pension Funds: These are financial institutions that receive input from their members, which they then invest. The long-term benefits can get a board that complements the pension that social security gives them.
- Credit Leasing (Leasing): These are financial institutions that buy equipment or property and lease it periodically. At the end of the lease, the landlord may choose to return the property or keep it for a small fee.
- Factoring Entities: Factoring institutions advance funds to customers, buying their debts at their own risk. They charge high-interest rates. They are financed by issuing debt securities or seeking credit.
- Mutual Guarantee Societies: They are entities that guarantee the credit that one of its partners applies for (serves as endorsing partners). They are funded by contributions from the partners (usually SMEs and the State).
- Official Credit Institute (ICO): It is a public body that channels funds to economic sectors that need it most.