ABSTRACT
Credit intermediation, accepting deposits or other short-term funding from surplus agents and lending it on to corporations, households and public bodies with borrowing needs is typically associated with banks. Traditionally credit intermediation has been provided through a business model where banks act as single intermediaries, managing all stages of the credit intermediation process. This chapter describes the main roles investment funds have played in credit intermediation in recent years. These include providing short- and medium-term funding to other financial entities that provide credit; taking over credit risk from banks and reversing their liquidity and maturity transformations by investing in structured credit; and substituting the role of banks in bearing credit risk by investing in credit derivatives. Investing in credit derivatives represents another way in which investment funds substitute the traditional role of banks in the credit intermediation process. This involves credit default swaps (CDSs), financial instruments that strip out the credit risk on an underlying asset.
