Financial Intermediation and Delegated Monitoring

Topics: Economics, Finance, Information asymmetry Pages: 4 (1161 words) Published: April 14, 2012
Financial intermediation and delegated monitoring
Financial market is channelling funds from people have an excess of available to people who have a shortage. A well- functioning financial market makes great contribution to the high growth economy. The behaviour of business activities and consumers are also affected by the financial market. Financial intermediaries such as banks and other financial institutions make financial market operate properly. Those financial intermediations provide investment opportunities by moving funds from surplus unit to deficit units (Mishkin, F.S., 2004). Since the likelihood of borrowers default, it is efficient for depositors to delegate monitoring to banks who have expertise and economies of scale to process the information of credit risk (Casu, B. & Girardone, C. & Molyneux, P., 2006). This essay will explore the theories of financial intermediation and its functions as well as its delegated monitoring.

In the whole economy, the main role of financial intermediaries and financial market is to provide a mechanism that can made funds transferred and allocated to the most productive ways. They channel funds from savers to borrowers so that promoting a better allocation of resources (Casu, B. & Girardone, C. & Molyneux, P., 2006). Allen, F. & Gale, D. (2001) indicated that “the nature of intermediated finance is that the decision on whether to invest in a project is delegated to the manager of the intermediary”. Borrowers obtain funds directly from lenders rather than banks to intermediate them in direct finance. However, the borrowing-lending process identified two barriers in direct finance, which are it is difficult and costly to match the complex need of individual borrowers and lenders; the incompatibility of the financial needs of borrowers and lenders. Generally, lenders want to lend their funds for a short periods and the highest possibility of return while borrowers require a cheap and long periods...
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