29_za_2010 - Copy

29_za_2010 - Copy - Examiners commentaries 2010 Examiners...

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Examiners’ commentaries 2010 1 Examiners’ commentaries 2010 29 Financial intermediation – Zone A Important note This commentary reflects the examination and assessment arrangements for this unit in the academic year 2009–10. The format and structure of the examination may change in future years, and any such changes will be publicised on the virtual learning environment (VLE). Specific comments on questions Candidates should answer FOUR of the following EIGHT questions. All questions carry equal marks. A calculator may be used when answering questions on this paper and it must comply in all respects with the specification given with your Admission notice. The make and type of machine must be clearly stated on the front cover of the answer book. Question 1 Explain how transaction costs and information asymmetry provide reasons for the existence of financial intermediation. Reading for this question The relevant reading relates to Chapter 1 of the subject guide (especially pp.9–14). Within these pages, there are Activity boxes which direct you to Further reading from Bhattacharya and Thakor (1993), Diamond (1996), Matthews and Thompson (2008) and Saunders and Cornett (2006). It is essential that you demonstrate evidence of reading beyond the subject guide in your answer. Better answers should include the technical elements presented in the subject guide and the suggested readings. Approaching the question This question requires discussion and analysis of key topics in the theory of financial intermediation. Your answer should begin by providing an overview of the important economic theories which seek to explain the dominance of intermediation over direct financing (see p.91 of the subject guide). You should highlight that the question requires a particular focus on the issues of transaction costs and information asymmetry. Therefore, liquidity insurance should only be mentioned briefly. Your answer should proceed by devoting considerable attention to the issue of transaction costs. An algebraic element (see p.10 of the subject guide) is expected, but you should also include a convincing intuitive argument. A useful approach to synthesise the different elements would be to discuss which types of borrowers use banks as a main source of finance (according to this theory). Your answer should then concentrate on the issue of information asymmetry. The theoretical literature argues that banks help to overcome this type of problem (moral hazard and adverse selection) in three ways:
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29 Financial intermediation 2 by providing commitment to long-term relationships with customers through information-sharing coalitions through delegated monitoring of borrowers. In order to adequately address these points, your answer must draw on
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This note was uploaded on 03/29/2011 for the course FIN 29 taught by Professor Oap.gwilym during the Spring '11 term at University of London.

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29_za_2010 - Copy - Examiners commentaries 2010 Examiners...

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