... varying ways. Bank financial intermediaries include retail banks dealing primarily with households and small businesses, investment (merchant banks) deal primarily with large corporations. Non-bank financial intermediaries include finance houses, building societies, insurance companies, pension funds, unit trusts and investment trusts (Blake, 2000). The above diagram shows the role of financial intermediation in its most simple form, the brokerage role. Here the intermediary simply matches the primary lender and ultimate borrower for which they receive a brokerage or agency fee. Aside from the redistribution of liquidity, intermediaries provide the much more important role of asset transformation, the creation of a 'new' security. This involves a liability being issued. A new security is required to remedy the problem described above that households wish to lend short and the business sector wish to borrow long. The household sector 'lends short' by saving in the bank in the form of cash held on deposit. The ...

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