Role Of Financial Intermediaries Research Articles

Piggy Banks: Financial Intermediaries as a Commitment to Save

Banks and other intermediaries may help savers commit to investment plans that savers could not stick to if they held assets directly. We illustrate this commitment function using a version of the Diamond and Dybvig (1983) model where savers’ short-run liquidity needs are correlated with shocks to investment opportunities. The investment securities are all freely tradeable, yet savers still do better if they delegate their investment decisions to an intermediary that overrides the savers’ liquidity demands when investment opportunities warrant. Bank CDs, insurance annuities, pensions, and even social security, by locking funds out of reach, may all constitute real world examples of this commitment role of financial intermediaries.

From Road Town to Shanghai: Situating the Caribbean in Global Capital Flows to China

Research Highlights and Abstract This article: Assesses the role of Caribbean offshore financial centres (OFCs) in FDI flows to China. Argues the OFC provides financial intermediation services beyond simply tax minimisation. Demonstrates a similar use of the OFC in other developing economies. Suggests the position of the OFC in global finance continues to evolve. This article examines the prominent location of offshore financial centres (OFCs) among the leading origin and destination points for foreign direct investment (FDI) to China. The OFC (characterised as a tax haven) frequently has been ignored or assumed out of analyses on Chinese FDI as simply servicing tax minimisation practices. This article challenges that assumption and emphasises the financial intermediation role performed by the Caribbean OFC beyond practices of tax arbitrage. Through the use of an international business company (IBC) registered in an OFC these jurisdictions perform several functions for investors, to include providing access to foreign capital markets, reducing tax obligations across multiple jurisdictions and concealing potential politically-sensitive beneficial ownership of the investment. This assessment for the role of the OFC in circuits of global capital involving FDI to China demonstrates that China's relationship with the OFC is different from that experienced by Europe and North America.

Operational Efficiency of Regional Rural Banks and other Commercial Banks of Odisha India : A Comparative Study

Abstarct: Banks play an important role in the economic development of a state. The banks play the role of financial intermediaries in the economic development of a state. The commercial banks help in flow of investment capital throughout the market place. The main tool for resource allocation in the economy is credit disbursed by the banks. When we look at the performance of the banks and also the services provided to the larger societies, we often find a glaring bias of public sector (PS) banks only for the urban areas. But Odisha has a population of 4.20 crore, of which 3.50 crore (83.33%) live in (51313) villages (as per 2011 census). Out of 51313 villages of Odisha, commercial banks function only in 1724 villages. The banking system in Odisha consists of public sector banks, private banks, development banks, specialized banks, and cooperative banks.

Consumerism in Action

Drawing from the medical sociology literature on the patient-doctor relationship and microeconomic sociological scholarship about the role of money in personal relationships, I examined patient-physician interactions within a clinic that offered eye health and cosmetic facial services in the United States. Relying on ethnographic observations conducted in 2008, I evaluated how financial pressures shape the patient-physician relationship during the clinical encounter. To gain a financial advantage, patients attempted to reshape the relationship toward a socially intimate one, where favor and gift exchanges are more common. To ensure the rendering of services, the physician in turn allied herself with the patient, demonstrating how external parties are the barriers to affordable care. This allied relationship was tested when conflicts emerged, primarily because of the role of financial intermediaries in the clinical encounter. These conflicts resulted in the disintegration of the personal relationship, with patient and physician pitted against one another.

Revisiting The Certifying Role Of Financial Intermediaries On IPOs

This paper re-examines the role of commercial banks, investment banks, and venture capitalists in monitoring and certifying the value of the firms that went public in the 2000s. We find that investment banks that have better reputations are associated with larger underpricing for venture-capital-backed IPOs, but not for non-venture-capital-backed IPOs. The partial adjustment phenomenon observed in Carter et al. (2001) exists only for venture-capital-backed IPOs. The presence of venture capital is inversely related to IPO underpricing only when venture capitalists certify small firms. We do not find that the presence of bank debt reduces IPO underpricing. In addition, we do not find any substitutive or complementary role between commercial banks and venture capitalists in certifying IPOs.

Financial Intermediaries and Economic Development – A Study of Transaction Costs of Borrowing for the Poor

This study while validating the increasing role for financial intermediaries in economic development has attempted to highlight the importance of reduction of transaction costs for financial deepening and consequent economic growth. It is elucidated that higher transaction costs of borrowing for the poor in particular will retard the long-term growth of rural financial markets. Further, the empirical analysis based on the primary (survey) data has analysed and established that microfinance models of lending offer considerably lower costs of borrowing than those in regular models of direct lending by banks. The study opines that microfinance model of lending can provide cost-efficient model of financial intermediation for speedy financial development to further economic growth.

Disintermediation or Financial Diversification? The Case of Developed Countries

Measuring an intermediation rate is a good way of capturing the importance of the role of financial intermediaries in a given economy and their position in the face of the growth in market financing. Results show a quite sizeable decline in the financial intermediation rate in France over the period concerned, characterised by the strong growth of capital markets and the increasing use made by non-financial agents of non-intermediated financing. This development should nevertheless be treated cautiously, for several reasons. First, because it stems largely from the internationalisation of the financing and investing movements of resident financial institutions (FIs) and of market financing received by non-financial agents. Thus, an increasing proportion of resident FIs' assets are held vis-a-vis non-residents and a growing share of the financing received by residents comes from the of the mainly from non-resident FIs. Second, because an analysis of the revenue of financial intermediaries confirms the change in their price setting practices and a shift in their activities. Lastly, because the choice by non-financial agents is not only made between intermediaries and direct-market access. First of all, this article analyses the changes in the intermediation rate in France and abroad. A growing share Is accounted for by the Rest of the world, while the financing of the national economy by resident FIs has declined. Conversely, resident FIs have developed their operations with the Rest of the world. A broader concept of intermediation is then proposed in order to deal with the so-called decline in financial intermediation. A complementary view of intermediation revenue makes it possible to measure the developments in resident FIs' earnings and to understand the changes that have enabled them to maintain their revenue.

Cajas de Ahorros: un modelo de compromiso con la sociedad,

Savings banks are increasingly interested in social issues, reflecting a corporate commitment to meet the demands of society. Our goal is to understand the importance of CSR (Corporate Social Responsibility) for savings banks and the actions carried out to promote it. To do this we assume that these entities are more resources devoted to society. The field work was conducted through a questionnaire answered by 57 Spanish institutions. We note that CSR is a growing movement with enormous potential, because of the role of financial intermediation and lending banks to develop. Finally, it is curious to see how social contributions materialize so correlated

Financial Structures and the Real Effects of Credit-Supply Shocks in Denmark 1922-2011

We examine the real effects of credit-supply shocks using a series of structural vector autoregressive models estimated on the basis on a new quarterly data set for Denmark spanning the past 90 years or so. We find no effects on the unemployment level from supply shocks to credit from commercial/savings banks in the periods 1922-1949 and 1981-2011 even though these periods contained several cases of severe banking and financial crises. Furthermore, credit-supply shocks do not seem to explain any significant share of the volatility in the unemployment rate during these periods. We attribute these findings to the large market for mortgage-credit loans in Denmark raised through bond-financed mortgage banks combined with comprehensive government interventions to safeguard financial stability during times of crises. There might, however, be indications of real effects from credit-supply shocks in the period 1950-1980 where credit rationing and exchange controls served as important economic-policy instruments. Overall these results indicate that both the financial system structure as well as the extent of government intervention during banking crises play a key role to the significance of real effects of credit-supply shocks. These findings must be kept in mind when modelling the role of financial intermediaries in macroeconomic models.

The role of financial intermediaries in elite money laundering practices

Purpose – One of the most pervasive economic crimes in the world today is money laundering. It has been estimated that some $2 to $3.6 trillion of hot money is laundered through the financial market each year. Such huge amounts of money cannot be successfully laundered without the involvement of financial intermediaries (such as bankers and lawyers) who used their expertise to conceal and obscure illegal activity. However, broader accounts of the role of financial intermediaries in corrupt practices are relatively scarce. The purpose of this paper is to examine some predatory activities of financial intermediaries in facilitating money laundering practices in Nigeria.Design/methodology/approach – The paper locates the role of financial intermediaries within the sociological theory of profession to argue that these professionals facilitate money laundering despite their professional and ethical claims. The paper uses publicly available evidence to illuminate the role played by financial intermediaries in e...

Monitoring Role of Financial Intermediaries and Design of a Market Model for Monitoring Under Market-Based Financing

Matching the suppliers and users of funds, financial intermediaries convey information from one to the other and are required to monitor fund-users on behalf of the suppliers. Bank-based financing is dominantly the theoretical arena in researching the monitoring role of financial intermediaries. We claim that market-based financing suffers from the vulnerability of not having a clear mandate for intermediaries to monitor. The indirect mechanisms, namely auditing and rating services, corporate governance principles, disclosure requirements, do not fulfill the informative and monitoring role of the intermediaries in market-based financing though this role is inherently assumed in bank-based financing. To fix this flaw, we tempt to develop a market model for financial intermediaries to monitor fund-raisers under market-based financing.

The bank lending channel: lessons from the crisis

The 2007–2010 financial crisis highlighted the central role of financial intermediaries’ stability in buttressing a smooth transmission of credit to borrowers. While results from the years prior to the crisis often cast doubts on the strength of the bank lending channel, recent evidence shows that bank-specific characteristics can have a large impact on the provision of credit. We show that new factors, such as changes in banks’ business models and market funding patterns, had modified the monetary transmission mechanism in Europe and in the US prior to the crisis, and demonstrate the existence of structural changes during the period of financial crisis. Banks with weaker core capital positions, greater dependence on market funding and on non-interest sources of income restricted the loan supply more strongly during the crisis period. These findings support the Basel III focus on banks’ core capital and on funding liquidity risks. They also call for a more forward-looking approach to the statistical data coverage of the banking sector by central banks. In particular, there should be a stronger focus on monitoring those financial factors that are likely to influence the functioning of the monetary transmission mechanism particularly in periods of crisis. — Leonardo Gambacorta and David Marques-Ibanez

Bad Advice: Explaining the Persistence of Whole Life Insurance

We conduct a series of field experiments to evaluate two competing views of the role of financial intermediaries in providing product recommendations to potentially uninformed consumers. The first argues that financial intermediaries may provide valuable product education, helping consumers decide which of many complicated products is right for them. Even if commissions influence intermediary recommendations, consumers are sufficiently sophisticated to discount advice. The second, more sinister, view, argues that intermediaries recommend and sell products that maximize the agents well-being, with little regard to the need of the customer. Audit studies in the Indian insurance market find evidence consistent with the second view: agents recommend a product that provides them high commissions, though it is strictly dominated by alternative products. Consumers demonstrating lower levels of sophistication are more likely to be offered the wrong product. Finally, we exploit a natural experiment that occurred during out audits to test how disclosure requirements affect product recommendations. We find that requiring disclosure of commission levels makes agents less likely to recommend the product for which disclosure is required.

The Bank Lending Channel: Lessons from the Crisis

The 2007-2010 financial crisis highlighted the central role of financial intermediaries' stability in buttressing a smooth transmission of credit to borrowers. While results from the years prior to the crisis often cast doubts on the strength of the bank lending channel, recent evidence shows that bank-specific characteristics can have a large impact on the provision of credit. We show that new factors, such as changes in banks' business models and market funding patterns, had modified the monetary transmission mechanism in Europe and in the US prior to the crisis, and demonstrate the existence of structural changes during the period of financial crisis. Banks with weaker core capital positions, greater dependence on market funding and on non-interest sources of income restricted the loan supply more strongly during the crisis period. These findings support the Basel III focus on banks' core capital and on funding liquidity risks. They also call for a more forward-looking approach to the statistical data coverage of the banking sector by central banks. In particular, there should be a stronger focus on monitoring those financial factors that are likely to influence the functioning of the monetary transmission mechanism particularly in a period of crisis.

A critical assessment of the financialisation process and its impact on the US labour force during the great recession

This paper analyses two main features of the financialisation period, namely: 1) the replacement of the 'originate and hold' banking model with the 'originate and distribute' banking model; 2) the securitisation process of structured finance products. These features have produced remarkable changes in the nature and role of banks and financial markets in modern economies. The paper shows that these remarkable changes together with inadequate governance arrangements and relaxed supervision by regulatory authorities have led to an increasing role of financial intermediaries and managers in the economy, which in turn, has had substantial stratification effects on employment and income opportunities of different occupations, gender and ethnic groups of the US labour force during the great recession.

Financial Intermediaries and Economic Development: Evidence on Transaction Costs of Borrowing by the Poor

This study, while validating the increasing role for financial intermediaries in economic development, analyzes the importance of reducing the transaction costs for financial deepening and, consequently, economic growth. It shows that higher borrowing transaction costs for the poor in particular will retard the long-term growth of rural financial markets. Further, the empirical analysis based on our primary (survey) data indicates that the microfinance models of lending offer considerably lower costs of borrowing than those in regular models of direct lending by banks. The study suggests that microfinance model of lending can provide cost-efficient avenue for speedy financial development and, subsequently, economic growth.

Financial Intermediaries and Monetary Economics

We reconsider the role of financial intermediaries in monetary economics, and explore the hypothesis that the financial intermediary sector is the engine that drives the financial cycle through fluctuations in the price of risk. In this framework, balance sheet quantities emerge as a key indicator of risk appetite and, hence, for the risk-taking channel of monetary policy. We document evidence that balance sheets of financial intermediaries provide a window on the transmission of monetary policy through capital market conditions. Short-term interest rates are found to be important in influencing the size of financial intermediary balance sheets. Our findings suggest that the traditional focus on the money stock for the conduct of monetary policy may have more modern counterparts, and suggest the importance of tracking balance sheet quantities.

Turkish banking system in the face of the global crisis

PurposeThe 2008‐2009 crisis had no significant impact on the Turkish banking system (TBS), with the TBS achieving a record level of profitability in 2009. The strong position of Turkish banks against the global crisis is attributed generally to the good regulation and risk management in the TBS. The measures implemented by The Turkish Central Bank, and The Banking Regulation and Supervision Agency, e.g. high capital adequacy ratio, played a significant role. But, this judgment does not take into consideration the high profitability and some inefficiency of TBS in his role of financial intermediation. The purpose of this paper is to analyze the TBS's performance in the face of the global crisis.Design/methodology/approachThe paper compare the measures against the global crisis and the performances of banking systems by public supports to financial sector, measures taken vis‐à‐vis the crisis, ratios as deposits/loans, loans to non‐financial sector and return to assets.FindingsThe paper explains that the performance of TBS against the crisis is, to some extent, due to the high profitability and low efficiency in financial intermediation.Practical implicationsFinancial regulation and policy particularly in emerging or underdeveloped economies should find equilibrium between the soundness and efficiency of banking system.Originality/valueIn full financial crisis the majority of scientific work focuses on the prudential regulation of the banking system and the problem of moral hazard. In fact, countries such as Turkey are still far from having the same problems and concerns. The paper shows that in spite of the global crisis, the TBS continued to obtain very raised profits: it can be said that the banking system soundness improved with the detriment the non‐financial sector.

Aggregate Consumption in Times of Crisis: The Role of Financial Frictions

The joint behaviour of US aggregate consumption and saving over the period 2007-2009, and notably the pronouned U-shaped pattern of consumption together with the rise in saving, are difficult to reconcile with the view that financial markets are frictionless. We propose an alternative framework in which financial markets are incomplete and where households form a buffer stock of precautionary saving to self-insure against the (time-varying) risk of falling into unemployment, with the consequence of considerably amplifying and propagating crises. Our model can be solved in closed form because the wealth heterogeneity generated by uninsured income shocks remains minimal. We end the article by arguing that fully incorporating uninsured and time-varying individual risks into macroeconomic analysis may drastically alter our understanding of the business cycle, macroeconomic policy, and the role of financial intermediaries.

A Resource-Based Theory of Entrepreneurial Finance

Fledgling, start-up firms are often hungry for resources to catalyze their growth. For such firms, Venture Capitalists (VCs) offer a double-edged sword. On the one hand, the unique resources provided by VCs offer the start-up substantial benefits at a stage when such resources are critical to its evolution. On the other hand, the VC's control over such critical resources can enable it to extract substantial rents ex-post. We develop a theoretical model to show that the start-up's choice of the financier balances the benefits from combining the idea with the financier's resources against potential expropriation by the financier. First, we show that though an entrepreneur has to cede greater ex-post surplus to a more resourceful financier, the benefits from allying with such a financier dominate these costs. Second, while increased ability to replicate the idea adds to the start-up's value, it enables the financier to extract more rents, thereby shrinking the entrepreneur's equity value. Third, greater complementarity between the financier's resources and the start-up's idea enhances (destroys) start-up value when the idea is relatively easy (very difficult) to replicate; thus greater complementarity may be a boon or a bane for the start-up. This paper contributes to the literature on financial intermediation by highlighting the role of a financial intermediary as a provider of key resources. Theoretical work in financial intermediation emphasizes largely the role of financial intermediaries in overcoming moral hazard and adverse selection problems. Specifically, in the context of active financial intermediaries such as VCs, theoretical work emphasizes the role of VCs as providers of advice to the startup. In contrast, this paper examines the role that active financial intermediaries such as VCs play in building new companies by providing them critical resources. We argue that financial intermediaries as resource providers impose costs on startups as well – their control of the critical resources also enables such financial intermediaries to extract considerable surplus ex-post. While the empirical literature has documented the benefits of VCs as providers of resources as well as the costs from the same, this paper represents a first attempt to analyze the trade-offs that startup firms face when working with resourceful financial intermediaries. Our approach thus attempts to integrate the task of financial intermediation to the role played by key resources in the growth and development of a firm.