Question

what are the theories of financial intermediation?

Answer 1

FINANCIAL INTERMEDIATION IS ALL ABOUT BANKS AND OTHER FINANCIAL INSTITUTIONS WHICH COLLECT FUNDS FROM DEPOSITORS AT A CERTAIN RATE OF INTEREST AND THEN LEND IT OTHERS AT A DIFFERENT RATE OF INTEREST.

IT REDUCES ASYMETRIC INFORMATION AND TRANSACTION COSTS. ALTHOUGH WITH THE PASSAGE OF TIME ,MARKETS HAVE BECOME MORE DEVEOLOPED, THE TRANSACTION COSTS AND ASYMMETRIC INFORMTION HAS DECREASED , BUT THE NUMBER OF FINANCIAL INTERMEDIARIES HAVE INCREASED.

NOW THE ROLE OF THE FINANCIAL INTERMEDIARIES IS THAT OF THE FACILITATOR OF RISK TRANSFER AND DEALING WITH THE COMPLEX MAZE OF FINANCIAL INSTRUMENTS. NOW THE ROLE OF A FINANCIAL INTERMEDIARY IS MORE OF RISK MANAGEMENT.

ALTHOUGH DUE TO THE DEVELOPED MARKETS, AND DIRECT INTERACTION OF PEOPLE WITH THE MARKETS ,THE ROLE OF THE INTERMEDIARIES HAVE DECREASED BUT THE TRADITIONAL ROLE OF BANKS WHICH HAS BEEN EXISTING SINCE CENTURIES STILL REMAINS THE SAME. WHERE THEY CHANNEL FUNDS FROM LENDERS TO THE FIRM ,CREATE EMPLOYMENT,CREATE SAVINGS ,PROVIDE LOANS TO THE NEEDY SPUR THE ECONOMIC GROWTH OF THE COUNTRY,GENERATE LIQUIDITY.