Banks as a Kind of Financial Intermediary

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Banks are one of those institutions through which the process of financial intermediation takes place because banks offer a fundamental mechanism to channel the sources for external funding for those in needs of funds and those who wants to save. However, since banks are major source of external funding therefore banks not only play a greater part in financial intermediation but also indirectly monitor the firms therefore also attempt to monitor the process of corporate governance, especially when firms face financial distress.(Winton, 2002).By definition, financial intermediary is “an entity that intermediate between providers and users of financial capital” (Greenbaum Thankor, 2007). Though the definition may seem simple but it indicates a multifaceted nature of financial intermediation because the word financial intermediation itself encompasses a much larger significance and magnitude.As we will be discussing in following sections that the financial intermediaries especially banks perform different functions therefore the process of financial intermediation. As manufacturing firm holds inventories for resell purposes, similarly financial intermediaries hold contractual rights over the assets of their clients. For example, the liabilities of the financial intermediaries especially banks include deposits as well as equity and debt acquired by them. By far, for any bank’s balance sheet carries deposits as the largest single liability whereas the equity contributed by the shareholders as well as debt instruments issued by financial institutions are other major liabilities. On the asset side, most of the assets comprises of the lending made to the businesses, individuals, governments etc. besides holding otherreal assets. However, what is most important with financial intermediaries is the fact that they also hold contingent claims against the assets they financed.