WHY ARE FINANCIAL INTERMEDIARIES SPECIAL?
Financial Intermediaries' Specialness
Liquidity and Price Risk
Other Special Services
Reduced Transaction Cost
Other Aspects of Specialness
The Transmission of Monetary Policy
Intergenerational Wealth Transfers or Time Intermediation
Specialness and Regulation
Safety and Soundness Regulation
Monetary Policy Regulation
Credit Allocation Regulation
Consumer Protection Regulation
The Changing Dynamics of Specialness
Trends in Australia
Instructor’s Resource Manual t/a Financial Institutions Management 2e by Lange, Saunders,
Answers to end-of-chapter questions:
QUESTIONS AND PROBLEMS
Explain how economic transactions between household savers of funds and
corporate users of funds would occur in a world without financial intermediaries
In a world without FIs the users of corporate funds in the economy would have to
approach the household savers of funds directly in order to satisfy their borrowing
This process would be extremely costly because of the up-front information
costs faced by potential lenders. Cost inefficiencies would arise with the identification
of potential borrowers, the pooling of small savings into loans of sufficient size to
finance corporate activities and the assessment of risk and investment opportunities.
Moreover, lenders would have to monitor the activities of borrowers over each loan's
life span. The net result would be an imperfect allocation of resources in an economy.
Identify and explain three economic disincentives that probably would dampen
the flow of funds between household savers of funds and corporate users of
funds in an economic world without financial intermediaries.
Investors generally are averse to purchasing securities directly because of (a)
monitoring costs, (b) liquidity costs, and (c) price risk. Monitoring the activities of
borrowers requires extensive time, expense and expertise. As a result, households
would prefer to leave this activity to others and, by definition, the resulting lack of
monitoring would increase the riskiness of investing in corporate debt and equity
The long-term nature of corporate equity and debt would likely eliminate at
least a portion of those households willing to lend money, as the preference of many
for near-cash liquidity would dominate the extra returns that may be available.
the price risk of transactions on the secondary markets would increase without the
information flows and services generated by high volume.
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