6.2 Functions of Financial Institution 金融机构的功能

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Financial institutions obtain funds byissuing financial claims against themselves to market participants, then investthose funds. Financial instruments play a basic role of transforming financial assetsthat are less desirable for a large part of the public into other financialassets—their ownliabilities—which are morewidely preferred by the public. This transformation involves at least one of four economic functions: 1) providing maturity intermediation; 2) risk reduction viadiversification; 3) reducing the costs of contracting and information processing;4) providing a payment mechanism.

1 Maturity Intermediation 期限中介

By issuing its own financial claims the commercial bank in essence transforms a longer-term asset into a short-term one by giving the borrower a loan for the desired investment horizon. This function of financial institutions is called maturity intermediation.

Maturity intermediation presents two implications for financial markets. First, investors have more choices concerning maturity for their investments; borrowers have more choices for the length of debt obligations. Second, because investors are reluctant to commit funds for a long period of time, they require long-term borrowers to pay a higher interest rate than on short-term borrowing.

2 Risk Reduction 降低风险

Consider the example of the investor who places funds in an investment company. Suppose that the investment company invests the funds received in the stock of a large number of companies. By doing so, the investment company diversifies and reduces its risk. Investors with a small sum to invest would find it difficult to achieve the same degree of diversification because of their lack of sufficient funds to buy shares of a large number of companies.

This economic function of financial institution-transforming more risky assets into less risky ones-is called diversification.

3 Reducing the Costs of Contracting and Information Processing 降低成本

Investors purchasing financial assets must develop skills necessary to evaluate an investment. Once those skills are developed, investors can apply them when analyzing specific financial assets for purchase. Investors who want to make a loan to a consumer or business need to write the loan contract.

In addition to the opportunity cost of the time to process the information about the financial asset and its issuer, the cost of acquiring that information must also be considered. All these costs are called information processing cost.

4 Providing a payment mechanism 提供支付机制

Although the previous three economic functions may not be immediately obvious, this last function should be. Most transactions made today are not done with cash. Instead, payments are made using check, credit cards, debit cards, and electronic transfers of funds. Financial institutions provide these methods for making payments.

The ability to make payments without the use of cash is critical for the functioning of a financial market. In short, depository institutions transform assets that cannot be used to make payments into other assets that offer that property.

Checkpoints:

 Why might you be willing to buy a bond issued by IBM but prefer to lend to the local computer store through a bank?