Financial Intermediaries

What are financial intermediaries?

Financial intermediaries are institutions that reduce the cost of moving funds between savers and borrowers. Common examples of financial intermediaries include:

- Banks

- Bond markets

- Stock markets

But why do we need these institutions?

Think about about all the times an individual or business may need to borrow or save money.

If you want to go to college, but don’t have the upfront cash, you may need to take out student loans. Or if you’re ready to buy a house, you’ll likely need a mortgage. You’ll also want to save money for retirement.

Whether it’s an individual or a business, borrowing and saving through financial intermediaries is very common.

As we saw during the 2008 financial crisis, financial intermediaries can fail. You may recall the failure of Lehman Brothers, a big investment bank connecting many savers and borrowers. There were many contributing factors to the Great Recession, but one of them was the failure of financial intermediation.

To learn more about financial intermediaries, check out our Macro section on Savings, Investment, and the Financial System.