A financial intermediary is an institution which creates and issues financial claims against itself and uses the proceeds to acquire and hold financial claims against others.

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A financial intermediary is an institution which creates and issues financial claims against itself and uses the proceeds to acquire and hold financial claims against others. Examples of financial intermediaries include commercial banks and mutual savings banks.

Households, businesses and any other owner of savings can hold large valuable amounts of direct securities. Financial intermediation can facilitate these amounts by offering a variety of services; the availability of equity and debt securities with different features that will be reflected in differences in liquidity, the availability of large amounts of information and analysis concerning a number of direct securities and the availability of trading facilities in both primary and secondary markets to facilitate sales and purchases.

Lenders typically have less information than borrowers and as a consequence they are faced with the problems of adverse selection and moral hazards. There are many ways in which financial intermediaries can reduce adverse election and moral hazards in the market.

Adverse selection occours when the potential borrowers who are the most likely to produce an adverse outcome are the ones who most actively seek out a loan and hence are most likely to be selected. Financial intermediaries can help solve the