Intermediaries

Intermediaries are institutions that “remanufacture” lenders’ resources into a form that is useful to borrowers. A simple example is when a bank intermediates between several depositors and one business loan borrower. Intermediaries include all the various types of banks, but there are several other important types of intermediaries such as pension funds, life insurance companies, mutual funds, private equity funds, hedge funds and securitization vehicles. Even “disintermediated” financial transactions—when companies borrow money by issuing bonds to lenders, rather than borrowing from a bank, for example—typically go through some kind of intermediary, such as an investment bank. Any financial vehicle which aggregates on savers' money and invests it in borrower obligations is performing the function of financial intermediation. Intermediaries function because God created humans to be social and heterogeneous, to act as agents, to make promises, and to be prudent risk takers.

Intermediaries allow humans to fulfill God’s stewardship mandate in two key ways. First, intermediaries develop networks of borrowers and lenders, investing their own resources to identify and build trust between parties. You would probably never lend money to a stranger to buy a house, but you would deposit money at a bank that lends to the stranger. You trust the bank because you know the bank has a process to makes sure it lends soundly to appropriate borrowers. Second, intermediaries make resources scalable by enabling many savers’ resources to be aggregated. You can’t lend enough money for someone to buy a house, but a bank with thousands or millions of depositors can pool their funds to make large loans possible.

One way intermediaries enable justice is by allowing non-elite households and small businesses to gain access to resources. Without intermediaries a household’s access to resources would be limited to the social relationships of that household. Poor households would likely stay poor. With intermediaries a poor household can borrow the resources to buy a house, car, college education or start a small business. Likewise with small businesses that do not have the size or reputation to issue bonds directly to investors. This allows for a more just society.

Intermediaries allow borrowers and savers to care for each other, which as we have seen is an act of love. The intermediary enables the borrower to obtain the needed funds more easily and more cheaply than if the borrower relies only on family and friends. Intermediaries also enable savers to save for the future in lower risk and higher return ways compared to hiding money under mattresses or lending only to acquaintances. Although the saver and borrower never meet, they are caring for each other by sharing resources in this way.