Explain the main reasons why financial markets and financial intermediaries exist.

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  • Topic: Debt, Economics, Financial intermediary
  • Pages : 4 (1210 words )
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  • Published : December 15, 2013
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Explain the main reasons why financial markets and financial intermediaries exist. Under recent years, our financial institutions have come under intense criticism, questioning their very purpose. In order to look at the questions that arise as to why financial markets and intermediaries exist, it is first important to look at what they are. Financial intermediaries and market’s main purpose is to create a mechanism where money can be reallocated to their most productive opportunities(Casu et al., 2006). However to find out why this is important and what other reasons there are for why they exist, this main purpose must be looked at in more detail: why agents in the economy borrow and lend money, how this financing occurs, and what the barriers are without these markets and institutions. A company or individual may not have all the funding needed to invest in a project or item from their own resources. While another such company or individual may have excess funds and may want to lend their own money in order to get a return. The financial market creates an opportunity for the potential debtor, known as a surplus agent, who wants to lend their money to offer it to the potential borrower, known as a deficit agent, for a small fee. This is a good example of how lending can give greater opportunity to individuals and organisations that would otherwise be impossible, in the short run, by internal funding: saving money or by raising funds from such people as shareholders. Nonetheless this is only an example of why lending is important. Financial markets also provide lenders and borrowers with what can be seen as a fairer assessment of the agreement between them: they can compare their arrangement with others like it on the market (the pricing function). The other difference between markets and individual lending is that markets are regulated. This regulation promotes deficit agents to not partake in any actions that may be detrimental to the value of their assets....
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