Do financial intermediaries help in the creation of liquidity? Give reasons for your answer.

Do financial intermediaries help in the creation of liquidity? Give reasons for your answer. 

Ans. Yes, Financial intermediaries do help in the creation of liquidity. They transfer funds from illiquid assets to liquid assets and thereby overall liquidity in the market increases. We can justify it as follows: 

1. In the absence of financial intermediaries, people will invest in real estate and certainly securities are more liquid than real assets. 

2. They exchange less marketable claim for more marketable claim. 

3. Through hedging function, they involve even risk averse investors in the market and therefore, total liquidity of the market goes up.