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Question:

Why do financial intermediaries exist? In your answer, discuss theories of financial intermediation, transactions costs and asymmetric information.

 

Answer:

Introduction

The overall project discussion is about the existence of financial intermediaries in financial markets. The different types of theories which is implemented on financial intermediation and also the transactions costs and asymmetric information followed by the financial institutions in the economy. Financial intermediaries are known professional institutions in the all around the financial market. There are certain functions that are about to used by the financial institutions are having three functional criteria. The other part of the essay is about concept of financial intermediation and the concepts of transactions cost and asymmetric information which is used by the different financial institutions for the measurement of financial scenarios of the organization (Gertler and Queralto, 2012).

There are different channels provided to the supply of capital and request sender of the capital during the financial process of intermediary in the financial market of an economy. Financial intermediaries are segmented into two parts monetary and nonmonetary intermediaries. Financial intermediaries can facilitate the transfer activities of funds generated by the financial institutions by the gains and deficit of the company. The primary reasons behind the existence of borrowers and lenders required to manage function to exist in the financial market that is general pricing factors and disciplinary factors. The financial markets are compared by the securities borrowers are considered to be the financially lacking situation for the valuation of assets. There are certain difficulties arise because of which the financial market because required financial intermediaries' existence in the economy (Williamson, 2012). The transformation of risk, liquidity provision, costs reduction, and different system of payments are the primary functions required which can easily support the link between borrowers and lenders in the market.

 

There are some functions that can be easily describing the reason behind the existence of financial intermediaries in the financial market. Transformation of size the amount of the depositors are not always equal to the amount of money lend by the borrower from the financial institutions. So the financial institutions never the lenders to pull their whole amount of deposited money at a one point of time. Maturity transformation is the function that primarily used for balancing the financial stability of depositor and lender by the bank for generating the working capital for utilization capital in the difficult period. The risk transformation activities are managed by the financial institutions in the economy as they are the investors in many project development activities in the economy that is having higher probability of losing invested money and the borrowers of the institution become bankrupt. The liquidity provisions are also maintained by the financial institution as the customers of the financial institutions can any time withdrawn money from their account so the financial institutions are required to maintained liquidity position of the institutions to for customers and some restrictions for the borrowers of the institutions (Gurley and Shaw, 2013). Cost reduction activities of the organization are based on the transaction activities of the organization that increases the transaction cost of the organization to reduce the repetition of contingency transaction and an opportunity cost of the transaction payment time. The provision of the payments system in the financial institutions are required to understand the customers by providing services of financial instruments and transaction cards etc. for the payment system of the financial institution easier. There are some of the reasons because of which the financial intermediaries are having existence in the global economy.

Provision for loans are generally a process which done by the financial institutions in the economy through depositing money in the financial institutions and lending money from the financial institutions with the help of the financial intermediaries. There are certain numbers of small-scale business activities that are required to financial grants and support through these authorities make their existence in the local and global market. The financial intermediaries are also helping in the growth and expansion of different business industry in the economy of a particular country that is supporting the growth phase of the country (Sealey, 2012). The borrowers and depositors have different interest from the financial institutions but the financial institutions required to provides same kind of services to their different customers as per their requirements. The financial intermediaries are making agreement on the basis of the full consent of both the parties of the organization. In the economy absence of financial intermediaries are difficult to spread the financial requirement of the people as per the savings and borrowing process of the financial organization.

The financial institutions also support in giving the financial advice to the different customers and clients in the economy. They required support the financial position of the company as per the financial advisory required by the clients for managing their financial status in the market. The financial institutions also support the different companies in the economy to generate funds from the market by issuing IPO and FPO and selling the companies stocks in the open market. According to the market scenarios and financial assumptions of financial institutions are for generating the higher funds from the financial instruments issued in the economy. Every financial intermediary in the economy is required to be maintained the structure of borrowing of the financial organization for the promotion activities of different financial funding activities of the organization. The financial intermediaries are taking responsibility for generating the funds for the organization and also some work like middle authorities to increase the sales figures of the organization. The institutions are also having all the authorities to evaluate and measured the different performance of the financial instruments in the organization for the interest of getting the commission for those activities by the different companies in the economy. The financial institutions are supporting to decrease the probability of risk of the organization within a given period to make those funding activities profitable for the organization. Financial institutions are functions as intermediaries in the economy to earn the commissions from the clients on behalf of their services provided to the potential customers of the client companies. The risk bearing activities for the investors in the organization to understand the financial stability of the organization is based on the different investment activities done by the financial institution for the customers and client's projects in the particular period of time. The risk monitoring is also one of the primary functions of financial intermediaries to evaluate the capability and risk bearing ability of the organization within a given period. The financial institutions increase the rate if the interest for the depositors to decrease the probability of risk in the investment activities of the organization.

 

The study about the financial intermediation is based on the certain theories and financial concepts. These concepts are providing asymmetric details, opposite selection and verification process of cost quality of the organization. This study is all about the understanding of the financial theories to provide them as financial applications of the organization. These financial intermediation theories are made for the growing the economic standards of the financial process to increase the economic welfare activities of the organization. There are certain theories that are required for the financial intermediation services in the economy is to understand the growth theory, portfolio theory, and other theories of intermediation in the financial market of an organization. The financial market of the global economy has been losing their creditability as there are no such kinds of better financial advice provided by the organization within a given period in the economy. The theories are made for the financial institutions for the intermediaries services provided to their clients and customers. There are certain theories which are required to maintain the financial stability of the companies in the economy with the help of the certain tools in the economy. There are huge numbers of amendments are made which is based on the financial intermediation theories. The structure of the financial intermediaries in the economy fully depends upon different keys prediction of the financial stability of the economy.

The perfect model contains the details about the different pillars of modern theories of finance are optimality, arbitrage, and equilibrium. Optimality is mentioned for the taking the rational decision-making activities of the organization that is considered to be optimal returns generated by the different companies in the economy. There are certain criteria that are based on the neoclassical model of the financial theories to enhance the performance of the capital in the modern scenarios of the organization. As per the perfect model theories individual parties can influence the stock prices in the market, there are certain activities that are implemented as per the financial markets terms and conditions. The financial models should not have any discriminatory taxes; all the financial structure should be homogeneous in nature.

There is some of the importance of the capital structure in the global economy to support the risk diversification and other financial information rationally in the market to make things more homogeneous for the fulfillment of overall expectations and reimbursement activities of the organization. The model of financial intermediation is to make the current theory of financial intermediation more specific for the financial institutions in the economy. There are certain theories that are required to understand the information system to maintain the financial services of the financial organization to control and manage the risk of the organization (Chaves and Gonzalez-Vega, 2012). There is certain kind of activities which is done as per the focusing on the quality of the financial structure of the company that is based on the financial system of the organization. There is certain kind of empirical research activities which is required for the measurement of the connection between the economical and financial growth of the companies surviving in the economy as per the long-term growth of the organization. The financial intermediation models are appeared to show the growth of the financial institutions by providing financial services to the companies and individual required in the economy. The financial intermediary's institutions are giving the different level of structure to provide a different savings level to the organization and individuals in the economy. Despite of the global financial services of the companies in the economy is driven by the deregulation and information technology of the organization which is competing with the different prices of the organization as per the financial services of the organization. There are also some of the modern financial intermediation theories that are based on the neoclassical theories (Tobin and Brainard, 2011). 

 

There is some firm that are followed the theory of the intermediation for getting the relevant numbers of financial services in the organization that is based on the theory or the asymmetric information of the organization. There are a certain number of financial details asymmetric which is related to the financial decision-making strategies of the economy. Some of the factors which clearly describe the different financial intermediation techniques of the organization are information gathering problems, transaction cost and also the regulatory factors problems in the organization.

Firstly, the financial, informational asymmetries can be generated naturally or due to adverse selection of the practices and rules chosen by the financial institutions of the global economy. There are several numbers of financial auditing activities and verification techniques required to measure the informational asymmetries are generated due to an imperfection of the nature of a market. There are certain deviations that occur in the neoclassical practices of the financial institutions that easily describes the imperfection of different transaction cost of the organization (Kahane, 2012). There is the certain cost that is required to be understood by the financial institutions as financial intermediaries for overcoming from the different cost of the organization.  The financial intermediaries are specifically delegating for monitoring the overall savings of the organization. The households investment activities are based on the depositing the finance that is based on the financial intermediaries for monitoring the returns of a scale of the organization. There are some of the financial which is based on the monitoring policies of the organization. Some of the positive incentive effective model for understanding of the financial policies of the institutions which will directly give impact on the managerial activities of the banking sector different ion to maintain the different financial structure of the organization.

The informational asymmetry studies are based on the focus of the financial institution to focus on the borrowers and depositors of the organization. In the information about the available required to be based on the screening and monitoring activities to maintain the verification activities of the organization. There are some of the other models that are required for the development of banking policies to make the lending policies of the financial institutions.

Transaction cost approach of the financial intermediaries' institution about the made assumption of the organization on the basis of the financial intermediaries' policies to make the process of transaction technology between depositors and borrowers as per the different benefits of production scale and future scope of the economy (Boyd and Prescott, 2013). The rules and policies which is required to understand the transaction costs for not exchanging the monetary transaction costs of the company in the economy and with the valuable advice of the financial institution the costs of the monitoring and auditing  for measurement of  financial position of the organization. The financial intermediaries transform different types of claims that are based on the qualitative and asset management techniques of the organization (Demirgüç-Kunt and Levine, 2012). There are some of the key functions generated for the diversification activities of different provision of liquidity which is play essential role in asset pricing theory with their different characteristics based on the efficiency of bargaining and negotiation by the financial institutions to their clients and customers. Transaction costs and informational asymmetry approach are the concepts that are primary reasons behind the existence of financial institutions as intermediaries in the economy.

 

Conclusion

Financial market are having based on the tools which are required for the raising capital for the financial institutions. There are certain numbers of concepts and requirements are followed which are required to generate the financial statement analysis of the organization within a given period. The overall discussion is about the existence of financial institutions as intermediaries in the economy. The financial institutions are serving different types of customers who are individuals and also the corporate institutions for the measurement of different organizational criteria of the financial organization in the global economy. As per the overall discussion, it is come to understand that different theories of financial intermediation which is financial institutions to restructure and redevelopment of the organization. There are some of the banking activities that are followed by the financial institutions for depositing and lending the finance in the market. The overall discussion is based on the theories of financial institutions as role playing of intermediaries in the global market with the support of transactional cost and asymmetrical informational approach of the financial institutions.

 

Reference

Boyd, J. H., and Prescott, E. C. (2013). Financial intermediary-coalitions. Journal of Economic Theory, 38(2), 211-232.

Demirgüç-Kunt, A., and Levine, R. (2012). Stock market development and financial intermediaries: stylized facts. The World Bank Economic Review,10(2), 291-321.

Kahane, Y. (2012). Capital adequacy and the regulation of financial intermediaries. Journal of Banking and Finance, 1(2), 207-218.

Akerlof, G.A. (2013). The market for “lemons”: Quality uncertainty and the market mechanism, Quarterly Journal of Economics 84, 488-500.

Gorton, G., and Pennacchi, G. (2013). Financial intermediaries and liquidity creation. Journal of finance, 49-71.

Tobin, J., and Brainard, W. C. (2011). Financial intermediaries and the effectiveness of monetary controls. The American Economic Review, 383-400.

Goldsmith, R. W. (2012). Financial intermediaries in the American economy since 1900. NBER Books.

Chaves, R. A., and Gonzalez-Vega, C. (2012). The design of successful rural financial intermediaries: Evidence from Indonesia. World Development, 24(1), 65-78.

Williamson, S. D. (2012). Costly monitoring, financial intermediation, and equilibrium credit rationing. Journal of Monetary Economics, 18(2), 159-179.

Gurley, J. G., and Shaw, E. S. (2013). Financial Intermediaries And The Saving‐Investment Process*. The Journal of Finance, 11(2), 257-276.

Adrian, T., and Shin, H. S. (2012). Financial intermediaries and monetary economics. FRB of New York Staff Report, (398).

Adrian, T., and Shin, H. S. (2011). Financial intermediaries, financial stability, and monetary policy. FRB of New York staff report, (346).

Hart, O. D., and Jaffee, D. M. (2012). On the application of portfolio theory to depository financial intermediaries. The Review of Economic Studies, 129-147.

Giliberto, M. (2013). Interest rate sensitivity in the common stocks of financial intermediaries: A methodological note. Journal of Financial and Quantitative Analysis, 20(01), 123-126.

Patinkin, D. (2012). Financial Intermediaries and the Logical Structure of Monetary Theory: A Review.

Sealey, C. W. (2012). Deposit rate-setting, risk aversion, and the theory of depository financial intermediaries. Journal of Finance, 1139-1154.

Brealey, R., Leland, H. E., and Pyle, D. H. (1977). Informational asymmetries, financial structure, and financial intermediation. The journal of Finance, 32(2), 371-387.

Ziegler, A. C. (2012). A game theory analysis of options: corporate finance and financial intermediation in continuous time. Springer Science and Business Media.

Cetorelli, N., Mandel, B. H., and Mollineaux, L. (2012). The evolution of banks and financial intermediation: framing the analysis. Federal Reserve Bank of New York Economic Policy Review, 18(2), 1-12.

Gertler, M., Kiyotaki, N., and Queralto, A. (2012). Financial crises, bank risk exposure and government financial policy. Journal of Monetary Economics, 59, S17-S34.

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