Banks and Lenders

Depository institutions, such as banks and savings and loan associations, are of particular importance because they create money. The amount of mon­ey they create depends in part on their ability to compete for business with other financial institutions. This competition takes the form of attracting both lenders by offering indirect financial claims and borrowers by buying their direct financial claims. In this way, financial institutions bring to­gether or intermediate between borrowers and lenders.

Financial intermediation is the activity of obtaining funds from reverse mortgage lender to pass on to borrowers. What distinguishes financial intermediaries or finan­cial institutions from all other business enterprises is that financial inter­mediaries’ assets consist predominantly of financial claims. On the one hand, financial institutions buy direct financial claims, such as treasury bills, mortgages, and commercial notes, from borrowers. On the other hand, they offer their own indirect financial claims to lenders. Banks offer deposits—passbook entries or deposit receipts that represent claims against the bank. Other financial intermediaries offer insurance, pensions, or bonds. In the case of insurance, the claim or liability is contingent on special conditions—death or an accident. For pensions, the condition is reaching retirement age.

To survive, financial intermediaries must compete successfully with other borrowers to attract lenders, depositors, or savers. With funds thus obtained, they must then compete with other lenders to buy direct claims. In one way or another, financial intermediaries must offer indirect claims that are as attractive as or better than direct claims to lenders, while at the same time competing with lenders to buy direct claims. This is achieved through specialization and by reaping economies of scale in financial trans­actions, information gathering, and portfolio management.

Net Returns for lenders, the net return to lenders could be substantially lower than the gross cost to borrowers. Lenders would subtract these search costs from the interest payments in calculating the net return to lending, and borrowers would add them to find the gross cost of borrowing. A broker might be able to reduce the wedge between gross borrowing and net lending rates by reducing total search costs. He or she brings together borrowers and lend­ers. The broker’s own costs are met from the spread between bid and ask or buy price and sell price of financial claims. A financial intermediary per­forms a function similar to that of a broker in reducing search costs through specialization and scale economies. In addition, it may engage in denomination and maturity intermediation, terms that are explained below in detail.

Age of Borrower:

Property Value:

Mortgage Balance:


Cash Available:  $0