- Financial intermediary
- A financial intermediary is an institution, like a bank, that receives money from savers and provides funds to borrowers.
- Depository institution
- A depository institution is an institution that accepts money deposits and then uses these to make loans.
Functions of the financial sector
Can you name the five functions of the financial sector?
Banks, building societies, insurers and markets for shares and currencies each carry out one or more of these.
Households with money they do not need now can store it safely in a bank and earn interest, rather than hunting for someone to lend it to.
Can you think of an example?
A family puts £200 a month into a building society savings account, which pays interest and lets them draw the money out when they need it.
Banks pool deposits and lend them to households and firms, choosing borrowers with good prospects of repaying, so savings are channelled into spending and investment.
Can you think of an example?
A bakery borrows £80,000 from its bank to buy a new oven, repaying it with interest over five years out of the extra bread it sells.
A payment system lets an economy exchange goods and services for money, through bank accounts, debit cards and transfers rather than cash.
Can you think of an example?
A shopper pays for groceries by debit card, and the money moves from her bank account to the supermarket's account in seconds, with no cash changing hands.
Forward markets let a firm agree today a price for currency or a commodity it will buy or sell later, protecting it against the risk of a price change.
Can you think of an example?
A UK exporter due to receive one million euros in six months pays a fee to fix today the number of pounds it will get for them.
Equity markets let firms raise money by selling shares, part-ownership of the firm, and let investors buy and sell those shares later.
Can you think of an example?
A growing software firm sells shares to the public for the first time, raising money to expand, and its shares are then traded between investors.