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  • October 5, 2020
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Intermediation

The process of transferring funds from savers (saving or surplus units- also consumers or household savers) to borrowers (deficit units- also investors) whereby the former lend to an institution (intermediary such as a bank, a thrift, etc) which then lends the funds to the latter. This involves the borrowers dealing with the intermediary and not with the savers. Intermediation provides a number of advantages, specifically: (1) the spreading of the risk of a default on a loan over a large proportion of savers (depositors); (2) the pooling of the funds of so many savers in a single loan or investment; (3) economies (cost savings) in the credit evaluation of borrowers; and (4) liquidity transformation.


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