Savings of financial resources. The emergence of this function is predetermined by the widespread need to accumulate money for its subsequent use (targeted investment or consumption). Of course, funds can be accumulated without resorting to the help of financial institutions, but it is less profitable and insecure.
Intermediation, as already noted, is the main function of financial institutions and logically complements the function of saving, because, accumulating the money saved and having to pay for it, a financial institution must be concerned about their use, generating income, which will be sufficient not only for payments to savers, but also to generate its own income. Thus, the funds go from the saver to the borrower, and the actual process of transferring the funds is accompanied by obligations of repayment and remuneration.
The financial intermediary, having received funds, gives in return the obligation to return them under certain conditions. In turn, the funds received are in some combination provided by the financial intermediary to some borrower also under the obligation to return them with remuneration. Depending on the financial instruments used, the return of funds can be carried out indirectly, through capital market mechanisms.
Financial intermediation is beneficial for many reasons. First, not all savers are specialists in financial operations who understand the intricacies of loan transactions. Second, even having some knowledge of such operations, a saver, when using the services of professionals, is relieved of the need to search for a specific variant of investing funds, i.e. saves his own time and resources for engaging in his main business. Third, the saver’s money begins to work. Fourth, the saver earns income, forcing the financial intermediary to make effective use of the funds he receives. Fifth, intermediaries can be used to diversify, reduce, or transfer risk to another person. Sixth, financial intermediaries can accumulate large amounts of cash and, once concentrated, invest it in projects potentially inaccessible to small investors or savers.
Financial transformation consists in the fact that short-term (financial) assets and liabilities can be transformed into long-term ones. This is achieved, in particular, by securitization of assets, when a credit institution pools its loans secured by relatively homogeneous assets and issues securities against common collateral. The opposite is also possible – “borrow short, lend long. For example, a company needs to invest, but cannot raise the necessary amount of money on a long-term basis. Then it makes short loans and invests them in a long-term project; this requires periodic prolongation of short loans, as well as confidence in the sufficiency of current income to pay the interest and principal of the short loan. Of course, there is a higher risk of rising interest rates. Some certainty in the renewability of sources of short-term financing is necessary.
Approximately the same logic is laid down in the operations of banking and investment structures, when funds raised for a short period are invested in a long-term project. Here two circumstances are taken into account:
a) the accuracy of settlements with short-term investors and therefore avoiding the situation when in a panic they will want to return their funds at once (even with possible losses);
b) the law of large numbers works in this case, when in the presence of many depositors fluctuations in the amounts of withdrawn funds are leveled out.
Risk transfer. The overwhelming majority of financial operations are risky by their nature; that is why in the process of their realization there always arises a desire to either avoid risks or reduce them. It is reached by different means, in particular by reception of guarantees and securities, and transfer of a part of risk to a financial intermediary.
Organization of currency transactions. In modern economics the great majority of companies are more or less connected with currency operations. In a developed market economy these operations are predetermined by the desire of the company to enter international markets of goods and factors of production. In the developing economy other reasons of currency operations are also valid – desire to create joint ventures, find a foreign investor, open foreign representation, to get from abroad new engineering and etc. In most cases such operations are performed via financial institutions.
Promotion of liquidity. Any company needs cash (in this case we mean cash on hand and on settlement accounts), but how much should be their volume is a matter of debate. Since current activity (including cash inflows and outflows) by definition cannot be rigidly predetermined, there is always a problem of creating a reserve of cash that could be used when, for example, the time came for repayment of accounts payable, but the money from the debtor, on which the company was counting, never came to the account. The simplest version of insurance against such a collision – building up a cash reserve – is not the most profitable, because money lying idle not only does not bring income, but on the contrary, leads to losses (e.g. due to inflation). Therefore, the most reasonable thing is to invest cash in highly liquid financial products offered by financial institutions, e.g. shares, short-term liabilities.
Organization of operations for changing organizational-legal forms of companies. The most typical operation of this kind is the transformation of a company into an open joint-stock company. The logic of business development is such that as the company emerges and the scale of its activities expands, its founders either become unable to provide proper financing for the company or, for various reasons, do not wish to do so. In this case, the company changes its organizational-legal form, becoming an OJSC, and thus obtaining the possibility of additional funding. Since such a procedure is complicated and time-consuming, a specialized financial institution is used for its implementation.
