This preview shows page 1. Sign up to view the full content.
Unformatted text preview: s and pension funds—household savers can reduce the transaction costs of their asset purchases. In addition, bid-ask (buy-sell) spreads are normally
lower for assets bought and sold in large quantities.
Maturity Intermediation An additional dimension of FIs’ ability to reduce risk by diversification is that they can
better bear the risk of mismatching the maturities of their assets and liabilities than can
small household savers. Thus, FIs offer maturity intermediation services to the rest of
the economy. Specifically, through maturity mismatching, FIs can produce new types
5 For a theoretical modeling of the link between credible deposit contracts and diversification, see Boyd and
Prescott, “Financial Intermediary Coalitions,” pp. 211–32.
Nevertheless, in the 1980s, 9 of the 10 biggest banking organizations in Texas also had to be closed, merged, or
reorganized, in large part because of their undiversified exposures to the heavily oil- and gas-dependent Texas
It might be noted that others have argued that diversification has costs for an FI in terms of fo...
View Full Document
This document was uploaded on 03/09/2014 for the course ACC 301 at HELP University.
- Spring '09