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3 moreover by acting as a partial corporate insider

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Unformatted text preview: s found in bond contracts.3 Moreover, by acting as a partial corporate insider and sending favorable information signals regarding the firm and its performance through bank loan renewals, the holders of outside debt and equity also benefit by acting on this information, as can firms which are then able to issue their securities at a lower cost. Thus, by acting as a delegated monitor and producing better and more timely information, FIs reduce the degree of information imperfection and asymmetry between the ultimate suppliers and users of funds in the economy. Liquidity and Price Risk Diversify The ability of an economic agent to reduce risk by holding a number of securities in a portfolio. In addition to improving the flow and quality of information, FIs provide financial or secondary claims to household savers. Often, these claims have superior liquidity attributes compared to primary securities such as corporate equity and bonds. For example, banks and thrifts issue transaction account deposit contracts with a fixed principal value (and often a guaranteed interest rate) that can be withdrawn immediately on dema...
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