Revision on financial intermediaries

What is the Transaction Cost Theory in financial intermediation?

It explains that financial intermediaries exist to reduce transaction costs associated with lending and borrowing by aggregating savings and allocating loans.

How do financial intermediaries act as delegated monitors according to Delegated Monitoring Theory?

They reduce the monitoring costs of borrowers by continuously evaluating credit risk and gathering information to ensure compliance.

What does the Liquidity Transformation Theory explain about financial intermediaries?

It explains that intermediaries provide liquidity by transforming short-term deposits into long-term loans.

What is the role of financial intermediaries in mitigating Information Asymmetry and Adverse Selection?

They effectively screen borrowers to reduce risks associated with lending to unsuitable clients.

How do intermediaries address Moral Hazard problems?

They monitor borrower behavior and impose covenants to align incentives and reduce reckless actions.

What is the Risk Transformation Theory in relation to financial intermediation?

It explains that intermediaries diversify and pool risks to make lending safer for individual investors.

What are Economies of Scale and Scope in the context of financial intermediaries?

Larger institutions can provide a wide range of services and efficiency in processing transactions, reducing average costs.

What is one benefit of financial intermediaries for lenders?

Risk diversification through pooling funds from many investors.

What is a major cost for lenders using financial intermediaries?

Lower returns due to fees or lower interest rates compared to direct lending.

What is an important benefit for borrowers when dealing with financial intermediaries?

Easier access to capital through streamlined processes.

What is a cost that borrowers face when obtaining loans from intermediaries?

Collateral requirements that increase risk.

What is a societal benefit of financial intermediaries?

They contribute to economic growth by channeling savings into productive investments.

What is a societal cost of having financial intermediaries?

Systemic risk, where large intermediaries can become 'too big to fail', leading to potential financial crises.