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Explain the possible adverse consequences to financial intermediaries from a change in the interest rate.
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Economics 01120627 Techniques of Risk Management January 2004 Explain the possible adverse consequences to financial intermediaries from a change in the interest rate. Financial intermediaries are institutions which channel funds from the primary investor to the ultimate borrower (usually from households to the business sector) and therefore act as 'agent-brokers'. In other words this is the movement of funds from the 'suppliers' to the 'users'. Suppliers are those with surplus funds (primary investors) and the users are those with shortages of funds (ultimate borrowers). This flow of funds from the primary investor to the ultimate borrower cannot occur directly because they possess different preferences and would therefore result in conflict. Attached to the primary investor are low risk, high liquidity and small volumes whereas the ultimate borrower comes with high risk, low liquidity and large volumes. The introduction of the intermediaries dissolves this conflict of preferences. There are two different types of financial...
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