Principle of Finance Question

Question One: Why has an increasing share of household savings been channeled through financial intermediaries?

The financial institutions are often considered financial intermediaries within the financial markets. They are characterized by pooling various financial resources together and channeling these funds from the savers or lenders to the spenders or simply borrowers. The financial institutions are vital in any economy and are thus highly regulated. Many household savings are often channeled through the financial intermediaries due to various reasons associated with the financial intermediaries compared to other savings channels. Some of these benefits are explained by (Franklin and Gale, 1023-1061). To begin with, owing to the crucial role that the financial intermediaries play in economic regulations and development, stringent measures, laws and policies have been developed to regulate their operations and thus enhance the safety of the customers and the economy too. The stringent regulation, safety, and security of the money banked with the financial intermediaries make them trusted by individuals compared to other available options.

Secondly, Franklin and Gale (1042-5) expresses that the high level of flexibility exhibited in financial intermediaries makes it easy of people to not only acquire and save funds it but can also carry out various transactions at wish. For instance, the financial intermediaries allow cheque deposits and withdrawals allowing the individuals to make large transactions between institutions and individuals. This mode of transaction is considered safe, convenient and flexible and is absent in other institutions. Lastly, financial intermediaries do not allow just savings to be done, but the individuals’ savings also earn interests on top of their savings. These advantages made financial intermediaries more favourable and preferred among individuals compared to the rest of the financial institutions available.

 

Reference

Allen, Franklin, and Douglas Gale. “Financial intermediaries and markets.” Econometrica 72.4      (2004): 1023-1061.