Financial Intermediation Process

Money and the Economy

 Money competes with other assets.

◦ Tangible assets are lasting physical objects.

◦ Financial assets are claims to immediate or future cash payments (bank deposits, bonds,
shares of stocks)

 Assets are what individuals, firms, and other participants in the economy own.

 People hold their wealth in various assets depending on the needs and rewards (rates of return)

Money and the Financial System:

 Money is transferred from savers to borrowers.

 Financial Institutions act as intermediaries in transferring money from savers to borrowers.
 Financial Institutions charge intermediation fee (interest rate or broker’s commission, trust fee,
etc.) for the transaction.

Financial Intermediation Process

Savers Financial Borrowers

Institutions

Households Banks Households

Firms Stockbrokers Firms

Government Mutual Fund

Government
Cos.

Trust Cos.
 Bank Intermediation Products:
 Traditional Deposits:
◦ Current Account (CA):
 A deposit account for the purpose of quickly providing access to funds anytime.
 Because of convenience, CAs do not normally bear interest.
 Withdrawing of funds via writing of checks
◦ Savings Deposits (SA):
 Depositors set aside a portion of their liquid funds and earn interest.
 Withdrawing of funds via ATM sites or thru a bank branch
◦ Time Deposits (TD):
 A deposit that has a specific maturity date.
 Withdrawal can be done at maturity date.
 Securities:
◦ Private and Government Securities