financial intermediary is an institution or individual that serves as a middleman among diverse parties in order to facilitate financial transactions. Common types include commercial banks, investment banks, stockbrokers, pooled investment funds, and stock exchanges. Financial intermediaries reallocate otherwise uninvest capital to productive enterprises through a variety of debt, equity, or hybrid stockholding structures.
Through the process of financial intermediation, certain asset or liabilities are transformed into different assets or liabilities.  As such, financial intermediaries channel funds from people who have surplus capital (savers) to those who require liquid funds to carry out a desired activity (investors)


Benefits of financial intermediaries

Through a financial intermediary, savers can pool their funds, enabling them to make large investments, which in turn benefits the entity in which they are investing. At the same time, financial intermediaries pool risk by spreading funds across a diverse range of investments and loans. Loans benefit households and countries by enabling them to spend more money than they have at the current time.
Financial intermediaries also provide the benefit of reducing costs on several fronts. For instance, they have access to economies of scale to expertly evaluate the credit profile of potential borrowers and keep records and profiles cost-effectively. Last, they reduce the costs of the many financial transactions an individual investor would otherwise have to make if the financial intermediary did not exist.
Potential Problems of Financial Intermediaries
There is no guarantee they will spread the risk. Due to poor management, they may risk depositor’s money on ill-judged investment schemes.
Poor information. A financial intermediary may become complacent about spreading the risk and invest in schemes which lose their depositors money (for example, banks buying US mortgage debt bundles, which proved to be nearly worthless – precipitating the global credit crunch.)
They rely on liquidity and confidence. To be profitable, they may only keep reserves of 1% of their total deposits. If people lose confidence in the banking system, there may be a run on the bank as depositors ask for their money bank. But the bank won’t have sufficient liquidity because they can’t recall all their long-term loans. (This can be overcome to some extent by a lender of last resort, such as the Central Bank and / or government)

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