This lesson examines financial intermediaries as the institutions that facilitate the flow of funds between savers and borrowers. It covers the functions of intermediaries, their role in reducing transaction costs and information asymmetries, and the major categories of intermediaries .

• Definition and Core Functions: Financial intermediaries are institutions that stand between savers and borrowers, channeling funds from those with surplus capital to those in need of funds. Their primary functions include reducing transaction costs, transforming maturities (short-term deposits into long-term loans), and managing risk through diversification. The University of Bologna course covers financial intermediaries, including definitions, economic rationale, credit intermediaries, securities intermediaries, and insurance and pension intermediaries .

• The Economics of Intermediation: Intermediaries exist to solve market frictions. They address adverse selection (the risk of attracting bad borrowers) and moral hazard (the risk of borrowers acting recklessly). They achieve this through screening, monitoring, and diversification. Intermediaries also provide payment and settlement services that facilitate commerce.

• Depository Institutions: Commercial banks, thrifts (savings and loan associations), and credit unions accept deposits from the public and use these funds to provide loans. They are regulated by central banks and other supervisory bodies. Banks also create liquidity by transforming deposits into loans.

• Non-Depository Financial Institutions: This category includes insurance companies (which pool risk and invest premiums), mutual funds and pension funds (which pool savings for investment in securities), and finance companies (which provide loans to consumers and businesses). These institutions do not accept deposits but are critical intermediaries.

• Investment Banking Firms and Broker-Dealers: Investment banks provide advisory services for capital raising and M&A, underwriting securities, and market-making. Unlike commercial banks, they do not typically accept deposits; they operate in capital markets, facilitating the issuance and trading of securities.