Therefore, the process of transferring resources from surplus spending units to deficit spending units is carried out by the financial system, which has different mechanisms to enable this transfer:
- Through the securities markets: The agents seeking financing issue securities or financial instruments that can be acquired by savers. In this case, the saver, although they do not negotiate with the issuer, takes the risk directly, since their money is placed directly in the company that issues the securities, which must comply with the rules established in the corresponding market.
- Through banking financial intermediaries: In this case, the saver delivers their money to a financial institution, which freely decides where to place it, taking the investment risk. Thus, the saver does not take any risk with the agents who get into debt.
Through these two mechanisms, the system generates the financial assets necessary to fulfil the function of transferring resources. However, the financial assets issued by the securities markets and those issued by financial intermediaries have differences:
- When you invest through the securities markets, you acquire a financial asset (share, bond, note, etc.), which at the same time represents a financial liability for the entity who issued it.
- When a person places their savings in a bank, they also acquire a financial asset (checking account, time deposit, etc.), which represents a financial liability for the bank. Otherwise, such banking institution generates financial assets (loans, etc.) derived from the agents to whom it grants loans.
Within the securities markets, the primary market is where the issuance of new securities takes place and the secondary market is where the purchase and sale of securities already issued occur. The saver who has invested in a security will recover the amount of their investment at the time of maturity established in the conditions of the corresponding issue. However, it must be taken into account that there are securities (such as shares) that have an indefinite duration, that is, they do not have an established maturity, and so if the owner wants to dispose of them, they have to go to the market.
On occasions, the holders of the securities traded in the markets can recover the investment made in advance without having to wait for the expiration of the agreed term, going to a secondary market for their exchange. To this end, the securities must be negotiable in such markets, and their sale must be carried out through authorized intermediaries.
Banking financial intermediaries are, on the other hand, institutions specialized in mediating between lenders and ultimate borrowers. They collect resources from savers for the realization of their investments. Unlike investments in markets, savers who entrust their resources to banks do not have to worry about analysing the economic situation of the ultimate borrowers, since they do not take direct risks with them, nor do they have to adjust their preferences to the financing needs, as these functions are carried out by financial intermediaries.
During the exercise of their activity, banking financial intermediaries offer their clients a series of products and services that can be grouped into three main headings:
- Liability-side transactions: They reflect the attraction of financial resources by the intermediary, which, in return, undertakes to provide returns to customers. These transactions include raising funds through demand and time deposits. Irrespective of this, financial intermediaries can also issue their own fixed income, debentures, notes, bonds, etc.
- Asset-side transactions: Basically, they consist of lending resources to their clients in exchange for an agreed return.
- Off-balance-sheet transactions: These are transactions that are not reflected in the balance sheet of the banking institutions, since they are limited to acting as mediators, without managing the money raised from customers, which is destined to investment funds, pension schemes, insurance… The execution of this type of transaction, which goes beyond the typical business of banking institutions, is what is known as the financial disintermediation process.
