Unformatted text preview: d. Providing Liquidity • Financial intermediaries offer us the ability to transform assets into money at a relatively low cost • Banks structure assets keeping enough funds in short-term liquid financial instruments • Specializes in liquidity management • Must design its balance sheet so that it can sustain sudden withdrawals e. Diversifying Risk • Financial institutions enable us to diversify our investments and reduce risk • Mutual funds f. Collecting of Processing Information • Information asymmetry: borrowers have information that lenders don’t II. Information Asymmetries and Information Costs a. Adverse selection • Before the transaction occurs •...
View Full Document
- Spring '08
- Economics, Financial Intermediaries