Banking And Finance

The theory of Financial intermediation

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Traditional theories of intermediation are based on transaction costs and asymmetric
information. They are designed to account for institutions which take deposits or issue
insurance policies and channel funds to ®rms. However, in recent decades there have
been signi®cant changes. Although transaction costs and asymmetric information have
declined, intermediation has increased. New markets for ®nancial futures and options
are mainly markets for intermediaries rather than individuals or ®rms. These changes
are dicult to reconcile with the traditional theories. We discuss the role of intermediation
in this new context stressing risk trading and participation costs. Ó 1998 Elsevier
Science B.V. All rights reserved

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English

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