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.
If finance is a means of care and love, doing finance through intermediaries raises a question. Can we love someone we do not even know?
We can indeed show love for people whom we do not know. Most of us are familiar with institutions in society that enable humans to show love to each other across distance and time. For example, employees and donors of NGOs such as Oxfam, World Vision and Red Cross, to name a few, are acting out of love for needy people around the world, even though they do not actually know the persons they are loving. Indeed even the work of developing those organizations is an act of love for our fellow humans. Similarly, although we do not usually think of this, savers who make bank deposits which allow borrowers to use those resources for a period of time can be acting out of love for the borrowers even if their exact identity is unknown to the savers.
This suggests a possible tension between stewardship and love, however. It seems that larger intermediaries should allow for better stewardship because they have opportunities to borrow and lend in many markets around the world. But smaller local intermediaries with more local relationships might be better at enabling love because they may know their customers more intimately. A big national bank might allow for more optimal stewardship and a small local bank might allow more intimate love. Our theology would urge banks and customers to consider this potential tradeoff when making decisions regarding the scale of their banks. If a bank chooses to be large, it should be with an explicit goal of excellent geographical and scale stewardship. If a bank chooses to remain small it should do so with an explicit mission to be excellent at love. Depositors should consider the same tradeoffs when deciding where to do their banking.
This is consistent with Catholic doctrine as outlined in Compendium of the Social Doctrine of the Church, (Pontifical Council for Peace and Justice Justice and Peace, Libreria Editrice Vaticana, 2004, Reprint April 2005), Paragraph 208.
David McIlroy, “Christian Finance?”, Ethics in Brief, Vol. 16, No. 6, (Spring 2011), urges us to structure intermediaries in ways, perhaps smaller, which allow a stronger connection or “fellowship” between borrowers and savers as a way to better serve both parties.