Modern Financial Intermediation Theory

The fundamental function of financial system is to allocate funds between different times and spaces. The financial system which brings the depositors and investors together is composed of financial markets and financial intermediaries. It is called indirect financing when the funds flow from depositors to investors through financial intermediaries, while it is called direct financing when the funds flow through financial markets. Since more and more companies raise funds they want by way of issuing securities in the financial markets, some theorists and practitioners think the banks and other kinds of financial intermediaries belong to "sunset" industry and some even affirm they will extinct like dinosaurs in the coming century. Advances in information technology and financial innovation also require a new study of financial intermediaries and markets.This dissertation is to make clear the roles of financial intermediaries in one economy from the perspectives of both theory and practice.This dissertation consists of six chapters.Chapter one, The Functions and Types of Financial Intermediaries, is the fundamentals of the whole theoretical analysis of the dissertation. We first introduce the composition of financial system and two kinds of financial models, the Anglo-Saxon Model and Japanese-Germany Model. Then we discuss six kinds of functions of financial interme-diaries,including payment intermediation, temporal intermediation, size intermediation, information production, delegated monitoring and risk intermediation, finally, we describe the business of three types of financial intermediaries. We concludes this chapter by emphasizing the functions of financial intermediaries.Chapter two, The Origins of Theory of Financial Intermediation, is a history survey of the theory of the financial intermediation. The earliest origins are the theories of Marxism and other classical economists on money, credit and banking. In the neo-classical economics, there are two different views on the role financial intermediaries in the economic development. One is the theory of financial development, which argues that the financial intermediaries are important to economic development. On the other hand, there is no role for the banks in the famous Arrow-Debreu Model since the financial markets are enough for financing in a perfect market.Chapter three, The Modern Theory of Financial Intermediation, provides an overall survey and review of the literatures on modern theory of financial intermediation. Just as Coase raise the question of "why do firms exist" and initiate the modern firm theory, the question of "why do financial intermediaries exist" points direct to the core of modern theory of financial intermediaries. The two paradigms of modern firm theory梩ransaction cost and information asymmetry梐re also the most important paradigms in modern theory of financial intermediation. We make a summery of the main models and hypotheses of the theory. They include Transaction Cost Approach of Benston and Smith,Jr.( 1976), Information Production Model of Leland and Pyle(1977),liquidity insurance model of Diamond and Dybvig(1983), delegated monitoring model of Diamond(1984) and participation hypotheses of Allen and Santomero(1998).We argue that all of these models and hypotheses try to explain the different functions of financial intermediaries, therefore, they are notcontradictory but supplementary each other. In the view of the author, all of these models are constructed on the basis of imperfect market paradigm, which implies the existence of transaction cost and information asymmetry. We conclude this chapter that the modern theory of financial intermediaries is not perfect itself, and it will develop with the development of the financial intermediaries.Chapter four, The Comparison of Financial Channels and the Choice of Financial Models. Both the financial intermediaries and the markets have the likely functions, and each has his advantages and disadvantages when financing different companies in different cou...