Financial Intermediation

2008

The presence of the financial intermediaries -that make the link between the economics agents, with the needs of resources and the one with surplus of resources -determinates the evolution of the banking system and the structure modification of these. What is the difference between a bank and a financial intermediary? The bank distinguish itself from the financial intermediary through its capacity of taking inside the costs and its informatic efficiency, and so the incomes are growing. Does the financial intermediaries represents a danger for the banks?

This essay reflects upon the relationship between the current theory of financial intermediation and real-world practice. Our critical analysis of this theory leads to several building blocks of a new theory of financial intermediation.

2002

Abstract The paper studies loan activity in a context where banks have to follow Basle Accord type rules and need to find financing with the households. Loan activity typically decreases when investment returns of entrepreneurs decline, and we study which type of policy could revigorate an economy in bad shape.

rij.eng.uerj.br

The role of banks in the economy is justified in the mainstream economics and finance literature by their ability to reduce informational asymmetries and to innovate risk transformation instruments. The political economy literature on governance, on the other hand, sees an important institutional role for banks in disciplining firm managers and facilitate financing of long-term productive activities of firms. The current banking crisis, however, has raised serious questions about such efficiency-based arguments and has undermined the arguments about financial innovation as market-based mechanism to support productive activities. The literatures on financial intermediation and corporate governance focuse on the efficiency of financial institutions and markets but ignores the historical transformation in banking since the early 1980s during which the Western economies have become financialized. In the first section this paper will provide a comprehensive critical review of the mainstream banking literatures. The second section will argue, through a set of empirics, how banks have reinvented themselves in a financialized economy by radically changing their balance sheet structure and revenue sources. The third section will conclude.

SSRN Electronic Journal, 2003

We consider a simple overlapping generations economy where the behavior of intermediaries, in a market characterized by asymmetric information and moral hazard, may give rise to cyclical equilibria. When capital increases output and savings also increase, and therefore more capital will be available in the following period. At the same time, however, interest rates also decrease and this induces intermediaries to reduce the amount of resources devoted to monitoring. A larger number of firms will select low quality projects and, because of this, less capital will be produced in the following period. For some parameter values this second effect may prevail over the first one and the stock of capital in period t+1 may actually be lower than the stock of capital in period t. The model provides a rigorous interpretation of the view associated with Hyman Minsky [14], Charles Kindleberger[12], and Henry Kaufman[11], according to which expansions come to an inevitable end because of excessive or ill-considered lending that took place during the boom.

SSRN Electronic Journal, 2001

We consider lending and investment under asymmetric information in an emerging economy. We allow for different forms of Þnancial contracts to arise endogenously in the credit market. We examine the impact of opening the capital account on both aggregate output level and the structure of lending arrangements. Financial intermediaries mitigate the moral hazard problem in investment choice through costly monitoring all projects and liquidating risky, negative NPV projects. Depending on the quality and cost of the monitoring technology, opening the capital account may strengthen or weaken the role of Þnancial intermediaries, leading to an improvement or worsening of the aggregate composition of investment projects. Our results suggest situations where limiting the capital inßow or outßow may be necessary to avoid an aggregate risk shift and the collapse of the Þnancial intermediation sector.

Research in Economics, 2005

We study the competitive equilibria of a simple economy with moral hazard and intermediation costs. Entrepreneurs can simultaneously get credit from two types of competing institutions: 'financial intermediaries' and 'local lenders'. The former are competitive firms issuing deposits and having a comparative advantage in diversifying credit risks. The latter are individuals with a comparative advantage in credit arrangements with a 'nearby' entrepreneur. Because of intermediation costs, local lenders are willing to diversify their portfolio by offering some direct lending to nearby entrepreneurs. We show that, in some cases, a fall in intermediation costs, by inducing local lenders to choose a safer portfolio, reduces entrepreneurs' effort and increases the probability of default. In these cases, taxing intermediaries may be welfare-improving.

2017

Journal of Monetary Economics, 2009

The business of money creation is conceptually distinct from that of intermediation. Yet, these two activities are frequently-but not always-combined together in the form of a banking system. We develop a simple model to examine the question: When is banking essential? There is a role for money due to a lack of record-keeping and a role for intermediation due to the existence of private information: both money and intermediation are essential. When monitoring costs associated with intermediation are sufficiently low, the two activities can be separated from one another. However, when monitoring costs are sufficiently high, a banking system that combines these two activities is essential.

Classical financial theory ignores the existence of financial intermediaries. In neoclassical micro-economics, the capital market brings together agents with financing capacity – investors – and agents with financing needs – companies. Thanks to the private information they possess, the latter on the productive potential of the company, the former on the marginal productivity of their investment, the trade can take place. I propose first of all to review the discourse that legitimises financial intermediaries through economic theory. This naturalised vision of finance could not be further removed from reality: the financial security only exists because of the presence of systems and organisations that give it its attributes (liquidity, status), take care of its distribution (via market institutions, distributors, advisors) and ensure its price history can be traced. The angle adopted is a resolutely micro-economic one, starting with the initial theory of financial intermediation put forward by Gurley and Shaw (1956). In a second part, I will present some socio-politically-inspired approaches that highlight the appearance of financial intermediaries through the possibility of legitimising the capture of economic rents. This aspect, which appears in many recent works focusing on the financialisation of the economy, emphasises the link between financial institutions and certain forms of political domination. Finally, the third part will present some of my own work in the field of social studies of finance which are based on observational field research and which explore the socioeconomic nature of financial intermediation. JEL: G2 Classical financial theory ignores the existence of financial intermediaries. In neoclassical micro-economics, the capital market brings together agents with financing capacity – investors – and agents with financing needs – companies. Thanks to the private information they possess, the latter on the productive potential of the company, the former on the marginal productivity of their investment, the trade can take place. In the Asset Pricing Theory approach, only financial securities are considered, these being defined through two statistical dimensions: their risk and their return. The resulting optimum portfolio depends on these parameters as well as on the investor's degree of risk aversion. Once again, there is no need to seek the services of an intermediary. Naturally, in macroeconomics , we find the same absence. Hicks (1974) contrasts the intermediated economy with the market economy where investors purchase their securities directly from issuers. The bank is distinguished by its inevitable presence in the transformation of deposits into loans. This naturalised vision of finance could not be further removed from reality: the financial security only exists because of the presence of systems and organisations that give it its attributes (liquidity, status), take care of its distribution (via market institutions, distributors, advisors) and ensure its price history can be traced. For financial institutions existed before securities (Carruthers, Stinchcombe, 1999) and it is these institutions and not securities themselves that have driven the development of finance. Without them, without their reputation, without the trust the community places in them, securities