The specific procedures through which the financial intermediaries can solve the problem of asymmetric information.
Concept Introduction:
Financial Intermediation- The productive economic activity in the financial market whereby an institutional unit engages in financial transactions in the market to acquire financial assets and in the process incurs liabilities in its own account. Transaction costs and economies of large scale, asymmetric information types like adverse selection (hidden information) and Moral Hazard (hidden action) are the rationales of financial intermediation.
Financial Intermediaries- The entity facilitating financial transactions to address the issue like lowering the transactions costs, facilitating portfolio diversification, asymmetry of information between the channelizing funds from the lenders to the borrowers and investors and beneficiaries is the financial intermediary. Banks, insurance companies, investment banks, and stock exchanges are examples of financial intermediaries.
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Economics of Money, Banking and Financial Markets, The, Business School Edition (4th Edition) (The Pearson Series in Economics)
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