The Theory of Financial Intermediation


Posted: 10 Sep 1996

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Anthony M. Santomero

University of Pennsylvania - The Wharton School

Date Written: August 1996


Traditional theories of intermediation are based on transaction costs and asymmetric information. They are designed to account for institutions which take deposits or issue insurance policies and channel funds to firms. However, in recent decades there have been significant changes. Although transaction costs and asymmetric information have declined, intermediation has increased. New markets for financial futures and options are mainly markets for intermediaries rather than individuals or firms. These changes are difficult to reconcile with the traditional theories. We discuss the role of intermediation in this new context stressing risk trading and participation costs.

JEL Classification: G13

Suggested Citation

Allen, Franklin and Santomero, Anthony M., The Theory of Financial Intermediation (August 1996). 96-32. Available at SSRN:

Franklin Allen (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Anthony M. Santomero

University of Pennsylvania - The Wharton School

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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