Please enable JavaScript.
Coggle requires JavaScript to display documents.
Lecture 3 - Financial Intermediaries (Role of Financial Intermediaries…
Lecture 3 - Financial Intermediaries
Costs involved with lending/borrowing
Verification Costs - Costs of evalutating borrowing proposals
Search costs - the cost of searching for potential customers and negotiating prices
Monitoring Costs - Tracking the actions of borrowers after the loan has been made
Enforcement Costs - Costs of enforcing the terms of the loan if the borrower defaults on a payment
Origin of Costs involved with lending
Asymmetric Information
Not everyone has the same information
some parties involved in a transaction have "inside" information
This generates moral hazard and adverse selection
Adverse Selection
occurs before the final transaction has taken place
worst borrowers most likely to produce adverse outcomes, hence most likely to seek loans
occurs if it is hard to determine the risk of an individual loan, therefore one rate is set for all loans
Moral Hazard
occurs after transaction
If the borrower engages in immoral activity it makes it more likely the loan will not be paid back
Role of Financial Intermediaries
Maturity Transformation
Liquidity Provision
Risk Transformation
Provision of Payment Service
Size Transformation
Cost Reduction