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Finical - Coursework Example


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Several types of financial intermediaries such as Banks, Insurance companies, building societies, pension funds, credit unions etc functions in an economy. The function of a financial intermediary is of prime importance in economic growth as it brings in contact two parties i.e. one having a surplus of funds who is looking for a venture to invest in so to earn a return on the money, and the second type which is looking to borrow funds. Since in the real world, it is rare that the demand of lender and borrower reconcile and thus a financial intermediary comes into play. A financial intermediary, such as banks, acquires funds from the lenders and subsequently lends them to the borrowers according to their desire rates. In this particular exercise the financial intermediary takes into consideration various needs of the lender and borrower such as maturity (which means the duration or term for which the lender wants to lend and the borrower wants to acquire) and rate of return/cost of debt (the lender wants to maximize the return, whereas the borrower wants to minimize the cost). The financial intermediary also aligns the information available, between lenders and borrowers, without which the parties would not be able to achieve their desired outcome. [2] Since a financial intermediary enjoys economies of scale and has greater expertise in managing the risk and rewards, it offers considerable cost savings to the lender and borrowers over direct lending and borrowing. In addition, the financial

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intermediary also offers risk aversion which assists the parties involved in spreading out and reducing the risk. (b) The assets side of the balance sheet of commercial banks primarily comprises of Cash and Bank balances, Loans and advances to banks and customers, financial assets and derivative financial instruments. Whereas the liability side of commercial banks presents items such as Customer deposits, subordinated loans, retirement benefit liabilities, trade portfolio liabilities and other financial liabilities. The banks usually finance its operations from the money that has been borrowed for the lenders in the form of customer’s deposits. Most commercial banks tend to invest in government securities which are readily convertible into cash at the time of need. [3] The investment portfolio of the banks, although represents a smaller portion of the bank’s assets as compared to the loans and advances exposure, is the primary source to discharge its liabilities (deposit withdrawals) and also to finance the banking operations (sanctioning of advances). In addition to maintaining a liquid investment portfolio, there are other options through which a bank can generate liquidity such as borrowing from the central bank of the country in which it operates, borrowing from other banks at the interbank borrowing rate (such as LIBOR) and raising capital through fresh capital issue. [3] A commercial bank’s capital comprises of the aggregate of issues, subscribed and paid-up capital and the retained earnings. The interbank


Banks and financial institutions have played a significant role in integrating the different economics of the world. A brief analysis of the global economic scenario can highlight the fact that the banking industry has always been that sector which has either strengthen or uplifted the economic outlook of a particular region, or has caused turmoil .Nevertheless, for a progressive and thriving economy, it is imperative for the banks to equip themselves with the awareness regarding the various risks and benefits that prevails in the market…
Author : faypfannerstill
Finical essay example
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