The Role That Financial Intermediaries Play Essay

The Role That Financial Intermediaries Play - Essay Example The incentive in the form of their commission is earned in return for their intermediation services and at times providing support and help to both the parties. â€Å"Financial intermediaries, serve as the "go between" between lenders and borrowers. The difference between what they earn and pay is their reward for intermediation. A complex financial system comprises both financial markets and financial intermediaries. We distinguish financial intermediaries according to whether they issue complete contingent contracts or incomplete contracts. Intermediaries such as banks that issue incomplete contracts, demand deposits, are subject to runs, but this does not imply a market failure. With regard to the Central Bank, the central bank can easily regulate and delegate its duties to these financial intermediaries who are directly in touch with the final users of finances as well as the providers and suppliers of funds in the economy. If the circulation of currency notes is considered, the se intermediaries can act as consolidators of old notes and disburse the new notes to their customers and depositors. In this way, the central bank can do away with its duty to circulate them itself. Similarly, various policies and controls can be designed by the central banks which are to be put in practice by these intermediaries. The financial intermediaries play a vital role in regulating and managing financial resources of a financial system. The central banks and the reserve bank can put their policies into practice in a more efficient way.