Financial intermediaries are essential institutions that facilitate the flow of funds between savers and borrowers, playing a critical role in individual and business financial activities, and their failure can have severe economic consequences.
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- [Narrator] What are financial intermediaries?
Financial intermediaries are institutions
that reduce the cost of moving funds
between savers and borrowers.
The most common financial intermediaries
are banks, bond markets, and stock markets.
Why do we need financial intermediaries?
Well, individuals and businesses need to borrow and save
at different periods of their lives.
Individuals rely on borrowing
to invest in things like education and housing.
If your car breaks down
and you don't have enough money to fix it,
you can borrow money for repairs
and continue living your life.
And, individuals need to save for retirement
when their incomes drop but their needs don't.
Businesses also rely on credit to operate and grow.
Entrepreneurs with great ideas but not much money --
they can borrow money or sell a stake in their idea
to get their venture off the ground.
For example, Howard Schultz built Starbucks into a global brand
by borrowing and raising capital
through several different types of financial intermediaries.
Though less common, businesses can also save money.
Now, sometimes, the individual who needs to borrow
knows the individual willing to lend.
But financial intermediaries allow you to venture
beyond just borrowing $5 from Grandma.
So we see just how common borrowing and saving
through financial intermediaries is.
But what happens when these institutions fail?
Much like our real bridges,
it's only when the metaphorical bridges
of financial intermediation crumble
that we recognize just how dependent we are on them.
As just one example, on September 15, 2008,
the world's financial system was shaken to its core
when the investment bank Lehman Brothers
filed for bankruptcy.
The impact was great,
not simply because Lehman was big,
but also because it was an important financial intermediary
that connected savers to borrowers.
The failure of Lehman marked the beginning of a series of events
that signaled America's worst economic downturn
since the Great Depression.
And while there are several significant angles
to the Great Recession,
one of them was the decreased efficacy
of financial intermediation.
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To learn more about specific kinds of financial intermediaries,
namely banks, click here.
Or, to test your knowledge on financial intermediaries,
click here.
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