Bank in the Theory of Financial Intermediation (La Banca Nella Teoria Dell'intermediazione Finanziaria)

Abstract

In this paper I review the theory of financial intermediation in order to explain the existence of banks. In the traditional neoclassical models of resource allocation, financial intermediaries play no role. When markets are perfect and complete there is no need for intermediaries. But banks have existed for many centuries. The theory of financial intermediation has suggested that many frictions are important in understanding financial intermediation. Transaction costs, asymmetric information and agency costs are some of them. The paper is organized as follows. The first section analyses the role of transaction costs in the resource allocation. The second section aims to examine the role of asymmetric information in the intermediation process, with signal problems and delegated monitoring. The last section analyses how agency costs and principal-agent relation contribute to understand the existence of banks.

Note: Downloadable document is in Italian.

Keywords: financial intermediation, bank, asymmetric information, transaction costs, agency costs

JEL Classification: G00, G2, D8, B2