Q. Show Advantages of financial intermediation?
The advantages of financial intermediation are as follows
Investors are able to pool their funds in a bank deposit account to facilitate access by companies to larger resources than would otherwise be the case. This permits companies to:
(a) Exploit investment opportunities that would or else be untapped.
(b) Become larger than would or else be the case and thus take advantage of economies of scale.
(c) Find capital readily and easily therefore reducing the costs associated with raising funds.
(d) Decrease the cost of finance since:
(i) Banks can with their greater financial expertise more precisely assess the risk of corporate investments.
(ii) Banks can diversify their risk across lots of companies thus lowering their required rate of return which in turn reduces the cost base on which interest charges to companies will be referenced.
(iii) Banks can decrease interest costs because of their size. They are capable to borrow on the wholesale market at rates that are not accessible to small banks or individual investors.
(e) Overpass the maturity gap. Banks are able to lend longer term than individual investors desire since banks will have access to a level of funds that is largely constant irrespective of a high turnover of constituent investors.
(f) Access finance for high risk projects that banks may perhaps find acceptable because of their capacity to diversify.