Show How a Financial Intermediary Can Solve Problems That Ultimate Savers and...

As Bain (1992; p.5) states, Financial intermediaries are institutions which attempt to serve the ask of both lenders and borrowers and are often able to reconcile the antithetic requirements of borrowers and savers. It is important to highlight that there are several different financial intermediaries; banks, building societies, insurance companies and pension scheme companies, entirely in this case the role of the bank as an intercessor will mostly be considered. In everyday loaning transactions the use of the direct method (ultimate savers and borrowers dealing now with each opposite) is uncommon. It has now become widely accepted that the cosmea of financial intermediaries actually makes direct contact unnecessary. It is true that if savers and borrowers dealt like a shot with each other then it would remove costs associated with using an intermediary. However, the direct method is an expensive and inefficient method of lend as it gives rise to many problems relating to information costs, administration costs, portfolio preferences, risk, lender of last resort and contracts and enforcement.

Problems associated with the direct r step upe and the ways in which intermediaries can solve these problems will be identified: instruction costs Search costs Savers and borrowers have to find each other, flummox information about each other, meet each other and negotiate a contract. If dealing directly with each other, the individuals implicated would have to incur these costs. It is often difficult for savers and borrowers to locate each other. They could use a broker but this is an expensive method. hitch costs Before the loan is given, lenders must verify the verity of information being provided about the borrower. If this process is not carried out correctly this may lead to asymmetric information surrounded by the borrower and the lender and may result in adverse infusion and moral hazard. Asymmetric information is where all parties in the... If you command to get a full essay, order it on our website: Ordercustompaper.com

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