The profitability of financial market intermediaries depends primarily upon which of the following?

• A. The value of their physical assets
• B. The spread between the interest rates they pay on liabilities and the interest rates they earn on assets
• C. The amount of government subsidies received
• D. The total number of clients they serve

Answer: (B)

Verified step by step guidance

1. Understand the role of financial market intermediaries: These entities, such as banks, earn profits by managing the flow of funds between savers and borrowers. Their profitability is influenced by the difference between the interest rates they pay and the interest rates they earn.
2. Define the concept of 'spread': The spread refers to the difference between the interest rate paid on liabilities (e.g., deposits) and the interest rate earned on assets (e.g., loans). This spread is a key determinant of profitability for financial intermediaries.
3. Analyze why physical assets are less relevant: While physical assets like buildings and equipment are important for operations, they do not directly impact the profitability derived from interest rate spreads.
4. Evaluate the role of government subsidies: Government subsidies may provide financial support, but they are not the primary factor influencing profitability for financial intermediaries.
5. Consider the number of clients served: While serving more clients can increase revenue, the profitability of intermediaries is primarily driven by the interest rate spread rather than the sheer number of clients.