StudentShare solutions
Triangle menu

The Theories of Financial Intermediation - Essay Example

Not dowloaded yet

Extract of sample
The Theories of Financial Intermediation

A lot of these imperfections direct towards specific kinds of transaction costs. These asymmetries can produce unfavourable selection, they can be temporary, generate moral exposure, and they can result a costly verification and enforcement. As proven on different studies, financial intermediaries come out to at least partially surmount these costs. Based on the interpretation of Leland and Pyle (32); financial intermediation act as an alliance of information-sharing, and intermediary coalitions as argued by Diamond (51) can attain economies of scale. He also projected that financial intermediaries can effectively monitor returns by acting on behalf of ultimate savers. Hart (1995) explained that savers optimistically value the intermediations in terms of ultimate investments.
According to Campbell and Kracaw (863-882) financial intermediations can create a useful incentive result of short-term debt on banker's behalf. The deposit funding can turn out the right incentives in managing the bank. A subtle financial organization necessary to control the bank managers produced illiquid assets (Diamond 393; Miller 21). In instances where the borrower in the bank chose direct finance; the role of a brokerage is in acted by financial intermediaries as explained by Fama (39-58) as investment banks. On this situation, reputation is at risk and according to Campbell and Kracaw (885) in financing, the financier's reputation as well as the borrower's is relevant.
Second Principle: The Transaction Costs Approach
This approach agrees with the concept of complete markets unlike the initial approach specified. It agrees that transaction process is of no convexities. In this approach, the financial intermediaries using economies of scale in the transaction process work in coalitions with borrowers. Many experts explained that the concept of transaction costs comprises not only monetary transaction costs, but at the same time covers auditing, searches and monitoring costs. Therefore, the function of the financial intermediaries is to transform specific financial claims into a so-called qualitative asset in this example. It is called offering diversified opportunities through liquidity as Ross (23-40) stated. The provision of liquidity is a main function for investors and savers and highly for corporate customers, in which the provision of diversification is welcomed in institutional as well as personal financing. Oldfield and Santomero (WP #95) in their submitted work paper stipulated that this liquidity plays a key role in asset pricing theory. Financial intermediation then becomes exogenous with transaction costs.

Third Principle: Principle in accordance to the regulation of money production
Regulation affects solvency and liquidity inside the financial market or organization. Diamond (414) argued that the capital of the bank affects its refinancing ability, bank safety, and ability to extract repayment from the borrowers. Regulation as viewed on the basis of legality convenes as a vital factor in financial economy. However, the actions of the ...Show more

Summary

One of the hot topics of debates nowadays is financial intermediations; since disagreements occur on the issue of financial intermediations as a significant role to consider in our modern financial system. To provide firm stand arguing that financial intermediations are still active and has proven to still play a significant role in the financial system; initially it is necessary to review the principles of the theory of financial intermediation…
Author : alexandrine41
The Theories of Financial Intermediation essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the essay on your topic
"The Theories of Financial Intermediation"
with a personal 20% discount.
Grab the best paper

Related Essays

Financial intermediation
Student's Name & Course Number: Professor's Name: Money and Business (Financial Intermediation) 20 July 2011 What is Financial Intermediation - In its simplest definition, it means acting as sort of a bridge between people who have excess funds (savers, depositors and lenders) and those who do not have funds but need the funds (borrowers or debtors).
3 pages (750 words) Essay
Financial systems around the globe
Financial Growth According to the conventional theories of financial intermediation, the intimidation stands on the transaction cost and requires use of full information. They are considered to do work by taking deposits and issue the insurance policy, which is the method to provide finance to a company.
6 pages (1500 words) Essay
Financial intermediation
13 Interpretation of the results 14 Summary and final recommendation 15 Bibliography 16 Summary In this article the estimated results of the merger and acquisitions of banks Canada, during 1867-1935 have been studied. It is stated that this activity supports the concentration-stability hypothesis and it is analysed.
12 pages (3000 words) Essay
Financial intermediation
The author designed a probabilistic model to measure such relationship, including the measurement of stability and instability. The researcher explored the topic according to the assumption that firms that undertake mergers and acquisitions emerge stronger in the process.
12 pages (3000 words) Essay
Cost of Financial Intermediation
Financial intermediation has a cost and that cost is reflected in bank rates and overhead expenditures incurred by banks. Bank rates, however, are not determined in isolation or only from the perspective of profit maximization by the banking sector. These rates are impacted by many other economic and statutory issues pertaining to a particular economy and such issues may vary widely from economy to economy depending upon the administrative attitude towards matters of equanimity in various sectors of the economy, especially the banking sector itself.
12 pages (3000 words) Essay
The Concepts of Financial Intermediation
Fundamentally, we may differentiate these principles according to three arguments on the existence of financial intermediaries: A. The argument on informational asymmetries - Market imperfections are generated because of the informational asymmetries like divergence from the neoclassical structure of financial system.
10 pages (2500 words) Essay
Financial Accounting Theories
In effect the three issues are conjoined within this theoretical approach. Political Economy Theory questions the supposed neutrality of corporate reports both regulated and unregulated. According to Howieson (2004), Political Economy Theory recognises the existing system of corporate reporting and "subjects to critical scrutiny those issues.
9 pages (2250 words) Essay
It is generally observed that financial systems around the globe perform similar functions, yet when we examine them closely we find that how and what they contribute in their growth-inducing role is markedly different. Evaluate and discuss this statement
They are considered to do work by taking deposits and issue the insurance policy this is the method to provide finance to accompany. By now a day’s
8 pages (2000 words) Essay
What is the role of transactions costs and asymmetric information in the financial intermediation process In your answer make reference to the theories of financial intermediation, and the problems of adverse selection and moral hazard
Simultaneously, the criticality of financial intermediaries has also been subjected to continuous scrutiny that has leveraged the working pattern of the global financial market to a large
10 pages (2500 words) Essay
Financial Intermediation
With this concern, the study of Ariss (2010) would help to determine the implications about the degree of market power, cost as well as profit
9 pages (2250 words) Essay
Get a custom paper written
by a pro under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
YOUR PRIZE:
Apply my DISCOUNT
Comments (0)
Rate this paper:
Thank you! Your comment has been sent and will be posted after moderation