As the sub-prime crisis has shown, any financial institution cannot be made to hold the financial system hostage to its questionable business practices.Īs the manifestations of the crisis are being felt and it is now apparent that the asset backed derivatives and other exotic instruments are amounting to trillions, the role of the central bank or the monetary authorities in reining in the rogue financial institutions is necessary to prevent systemic collapse.Īs capital becomes mobile and unfettered, it is the monetary authorities that have to step in and ensure that there are proper checks and balances in the system so as to prevent losses to investors and the economy in general. The very nature of the complex financial system that we have at this point in time makes the need for regulation that much more necessary and urgent. Asset based financial intermediaries are institutions like banks and insurance companies whereas fee based financial intermediaries provide portfolio management and syndication services. As outlined above, Banks often serve as the intermediaries between those who have the resources and those who want resources.įinancial intermediaries like banks are asset based or fee based on the kind of service they provide along with the nature of the clientele they handle. The reason for the all-pervasive nature of the financial intermediaries like banks and insurance companies lies in their uniqueness. Unlike the capital markets where investors contract directly with the corporates creating marketable securities, financial intermediaries borrow from lenders or consumers and lend to the companies that need investment. In the financial system, intermediaries like banks and insurance companies have a huge role to play given that it has been estimated that a major proportion of every dollar financed externally has been done by the banks.įinancial intermediaries are an important source of external funding for corporates. Financial Intermediationįinancial intermediaries work in the savings/investment cycle of an economy by serving as conduits to finance between the borrowers and the lenders. In theoretical terms, a financial intermediary channels savings into investments.įinancial intermediaries exist for profit in the financial system and sometimes there is a need to regulate the activities of the same.Īlso, recent trends suggest that financial intermediaries role in savings and investment functions can be used for an efficient market system or like the sub-prime crisis shows, they can be a cause for concern as well. It is the institution or individual that is in between two or more parties in a financial context. In 2007, they were given the moniker “shadow banks” by economist Paul McCulley, at the time the managing director of Pacific Investment Management Company LLC (PIMCO), to describe the expanding matrix of institutions contributing to the then-current easy-money lending environment-which in turn led to the subprime mortgage meltdown and the subsequent 2008 financial crisis.A financial intermediary is a firm or an institution that acts an intermediary between a provider of service and the consumer. NBFCs existed long before the Dodd-Frank Act. Most of the shadow banking sector is made up of NBFCs, which fall under the oversight of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Even so, shadow banking has grown in size and largely escaped government oversight since then, posing potential risks to the global financial system.The shadow banking system played a major role in the expansion of housing credit in the run-up to the 2008 financial crisis.Shadow banking is generally unregulated and not subject to the same kinds of risk, liquidity, and capital restrictions as traditional banks are.The shadow banking system consists of lenders, brokers, and other credit intermediaries who fall outside the realm of traditional regulated banking.
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