Financial Intermediairies by Tadjeddine

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.

This book is about the social and cultural study of finance, of the markets and institutions used for fmancial transactions, and the trading of assets and risks. The financial system controls and manages credit; in contemporary societies, the ultimate users of real capital rely heavily on others (investors) to provide the funds with which to acquire the resources they need. Investors make the transfers of money to those seeking credit in the hope of reaping profits at later points in time; the debts the receivers of the funds incur are claims investors can make on future income and on economic output and development. Characteristically, these claims (which take the form of company shares, governments bonds, etc.) and their derivatives are marketed and traded onfinancial markets••••with the help of financial intermediaries (e.g. banks, brokerage houses, insurance companies) who package the deals, assume some of the risks, and facilitate the trading of claims and risks among market participants. The existence of such markets allows participants to sell claims and risks they no longer want, and to pursue additional profits through clever trading. Financial markets, then, are a major, if not the most important component of the credit mechanism in risk-based economies. Economists regard them as constituting an efficient mechanism that :fuIfi11s vital functions 01: and for, the financial system: for instance, they pool and transfer wealth for capital use, decrease the costs of finance (through the elimination of banks as direct lenders), and spread and control risks risk being more widely distributed when credit is obtained in financial markets through the splitting of shares and through derivative products that can be used for hedging risky investments (e.g. Merton and Bodie 1995: 4f, 13-15). In contemporary Westem societies, financial activities are a defining characteristic not only of the corporate economy, but also of politics, the welfure and social security system, and general culture. For example, the corporate economy has long depended on credit to finance production and investments. A Robinson Crusoe with nothing to invest could not hope to produce much. He would first have to invest his own time and labor in order to build the rudiments of a productive capital structure (Shapiro 1985: 77). As Susan Strange argues (1994: 30), if we had had to wait for profits to be accumulated there would have been none of the economic growth of the past decades in industry and agriculture. The state has long needed credit and borrowed vast amounts of money. From the seventeenth century onward, states systematically financed costly military interventions by issuing debt (government First publ.

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?

2014

This dissertation examines the evolution of financial sectors and provides an analysis of the linkages among finance, the real economy, and the social structures in which they are embedded in the context of the evolution of financial sectors. It analyzes the social and economic consequences of an increasingly complex, financialized economy.

Journal of Banking & Finance, 2000

This comment discusses the review by Franklin Allen and Anthony Santomero of the theory of ®nancial intermediation in the 20th anniversary special issue of the Journal of Banking and Finance. We do not fully agree with their view that risk management is only of recent importance to the ®nancial industry and with putting central the concept of participation costs. We suggest how the theory of ®nancial intermediation might be developed further in order to understand present-day phenomena in the ®nancial services sector.

European Journal of Political Economy, 1992

What are functions of financial intermediaries which cannot be performed equally well by asset markets? In this general equilibrium model with private information, financial institutions provide superior risk sharing since they implicitly enforce ex ante precommitments and can offer agents non-linear choice sets as opposed to linear consumption choice sets offered by asset markets, like credit or equity markets. When it comes to financial arrangements, economists understand the properties of financial markets quite well. Yet every financial system is also characterized by the existence of financial institutions. At the same time, it is not well understood under what conditions, and why, financial institutions dominate trading on asset markets. What are the functions of financial institutions which cannot be performed equally well by trade on asset markets? This paper tries to shed some light on this question by constructing a general equilibrium model where a specific kind of financial intermediation dominates market outcomes. This allows to illustrate the key characteristics of deposit contracts that make them superior to trade on asset markets. One approach to financial intermediation is based on the notion that intermediaries are more efficient in acquiring information about the prospects or realized returns of investment projects. This explanation was first fonnulated rigorously in a fully specified environment by Diamond (1984). Diamond and Dybvig (1983) claim to provide an alternative rationale for financial intermediation in an environment where agents have uncertain future preferences and are therefore uncertain about the timing of their consumption.

This article introduces a special issue of Business and Politics on Property Rights, Financial Risk, and the Politics of a Networked Global Financial System. We introduce aspects of the articles in the issue and situate them within existing liter-atures in financial economics, public policy, political economy, regulation and gov-ernance, and network science. We do this through examining four key contributions in the special issue. First, we show that common conceptualizations of property rights in financial markets ignore the multidimensional nature of financial goods; examples of all goods types can be found in modern finance, and this fact has important implications for the politics and regulation of these markets. Second, we argue that models of financial actors as independent, atomistic agents neglect the relational nature of financial markets, and argue that theory and methodology from network science, financial economics and political economy provide useful ways to analyze these interdependent systems. Third, we discuss how the relational nature of risk leads to hierarchical patterns of financial interdependence, which bequeaths substantial amounts of power—within both market and political systems—to those actors that occupy core positions within the structure of interdependence. Fourth, we integrate ideas from papers in this special issue and related literature with concepts from the Ostrom School of political economy to consider how monitoring, self-governance, and polycentric applications might improve financial market governance. This issue's papers thus constitute one of the first combined attempts to bring the Ostrom School into substantive conversation with financial market governance and risk analysis through comparative and international political economy disciplines.

Journal of Contemporary Issues in Business and Government, 2021

This study tries to examine the role of financial intermediaries in capital market. And also looks over the impact of financial intermediaries on capital market development. Financial intermediaries exist for the profits within the Financial system. Capital market is the place where the savings and the investment have been done between the suppliers and the people who need the capital. The financial intermediaries arise to reduce the information of risk management and the mobilisation of the savings. These intermediaries assist the investors to grow their money by the way of investments. This paper comes to the opinion that financial intermediaries play a major part in the economy and helps the investors easily make investment in the capital market.

The Journal of Finance, 1994

A study of financial institutions and money and capital markets, and the role of financial institutions in the intermediation process. Special emphasis is on the comparative financial policies of financial institutions considered in the context of their market environments.

2017