Finance Case
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Without information and transaction costs, financial intermerdiary will not exist. This statement is true because to transfer funds from lenders to borrowers , financial intermerdiary will exist. It is called indirect finance. A financial intermerdiary borrowing funds from the lenders -savers and using these funds by issuing a liability to the public in the form of savings deposits.
In financial intermediary, information and transaction costs is so important in financial markets. Through transaction cost, we can spent our excess funds to lend in financial markets with secure. Financial intermediary can reduce transaction cost because they have developed expertise in lowering them and because their large size allows them to take advantage of economics scale. It also can provide liquidity services which financial intermerdiary provide services that make it easier to conduct a transactions. That is mean, depositors can earn interest on checking and savings accounts and the benefits from savings account, it can convert them into goods and services.
The Asymmetric Information is important role in financial intermediary . we do not know whether the information we know is accurate or not. This inequality information is called asymmetric information. The information that difficult to know accurately is whether the borrower afford to pay payment or not. Basically the problems creates whether before and after transactions exist.
Adverse selection is the problem created by asymmetric information before the transaction happen.
The problem moral hazard happen by asymmetric information after the transactions. It is created when the transactionshas not entered into the contract in good faith, has provided misleading information about its assets, laibilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settels.
As a conclusion, financial intermerdiary exist to transform funds from savers to lenders to improve economic welfare of units, to reduce transaction costs through economics of scale and expertise hired and to reduce asymmetry problems. The relative financial intermediary are shown in Figure 1