Wednesday, August 26, 2020

Japanese Dining Etiquette Essay Example for Free

Japanese Dining Etiquette Essay Recalling your right habits is significant in Japan, particularly concerning the territory of feasting manners. This applies particularly to outsiders, who should attempt to recollect at any rate the most fundamental rules†¦ In Japanese dinners, it is standard to state ‘itadakimasu’ (‘I thankfully receive’) before your feast, and ‘gochisama deshita’ (‘thank you for the meal’) after you have wrapped up. These conventional expressions are to show your gratefulness for the feast, particularly when somebody cooks for you. The most ideal approach to begin your supper is with a taste of soup. At that point you ought to eat a tad of each dish, in a ‘rotation’, until you finish all the dishes at about a similar time. Try not to finish one dish of food before moving onto the following. Recall that on the off chance that you are eating from mutual dishes, it is viewed as a significant manners to get the food utilizing the far edge of your chopsticks, or serving chopsticks if any are given. Try not to begin drinking until everybody at the table is served, and don't pour any beverages for yourself. This should just be finished by others, and normally, it is additionally your obligation to intermittently check your friends’ cups and top them off on the off chance that they are vacant, as well. NEVER stick chopsticks into rice standing up, as this is the manner by which rice is offered to the dead. On the off chance that you haven’t effectively heard, it is completely satisfactory to gulp your noodles in Japan, as individuals state it tastes better, and it additionally shows you are making the most of your supper. Recollect that it is viewed as impolite to burp, clean out your nose at the table, and discussion about unappetizing points. In conclusion, make sure to complete each and every grain of rice in your bowl or plate, as rice is viewed as valuable. Additionally this shows the gourmet specialist you value his/her food without question. It is likewise viewed as amenable to restore all plates and dishes back to their unique positions, and to put chopsticks back in their paper slips or holders. List of sources http://www.japan-guide.com/e/e2005.html http://www.suite101.com/content/eating-japanese-dos-and-donts-a31496 http://www.japanesefood101.com/index.php/classification/feasting behavior/.

Saturday, August 22, 2020

Strategic Audit

Key Audit Official Summary The worldwide sportswear industry is getting one of the most serious ventures on the planet. One of the fundamental organizations that work in the business is the Adidas Group. The motivation behind this paper is to do a key review of the Adidas Group.Advertising We will compose a custom report test on Strategic Audit Adidas explicitly for you for just $16.05 $11/page Learn More The paper has adopted an expanded strategy of examination; inside investigation and outer examination. Different models of examinations have been applied in the paper, and they incorporate PEST and the Porter’s investigation. The examination was planned for catching the methodologies of the organization and how they help it to adjust to the serious powers in the business. The discoveries from the examination bring up that Adidas is as yet serious in the business. The intensity has been improved through spotlight on the worldwide methodology of the board. Acquaintance According with Sla ck (2004), the worldwide games industry is developing at a speedy pace because of commercialization of sports. The quantity of games has been rising every day, in this manner pulling in more individuals legitimately and by implication into the brandishing business. In the contemporary occasions, the games business has a wide number of partners. The most basic inquiry to pose is the thing that the development of the donning business suggests for the business world. The development of the worldwide wearing industry has pulled in numerous business players in the donning business by introducing the chance to gracefully the brandishing framework and hardware. There are a considerable number of organizations that bargain in the worldwide wearing industry (Andreff Szymanski 2005). Adidas is one of the organizations that have worked in the worldwide wearing industry for an all-encompassing timeframe. The Adidas organization is a Germany based global organization that bargains in the assembl ing and structuring of wearing product and hardware, which incorporate balls, brandishing outfits and garments, shoes, sports sacks, footwear, watches, and eyewear among others.Advertising Looking for report on business financial matters? We should check whether we can support you! Get your first paper with 15% OFF Learn More The organization was established in the year 1920. Be that as it may, the principle activities of the organization can be followed from the year 1948, however there had been a great deal of improvements years back preceding the choice to open the organization. The worldwide base camp of Adidas are in Herzogenaurach. Adidas goes about as the fundamental holding organization for the Adidas gathering, which is involved Rockport, Reebok sportswear organization and the Taylor-made Adidas golf organization. The organization is considered as the most predominant sportswear organization in Germany and the whole Europe, while universally, Adidas is positioned as the sec ond most serious sportswear organization. The organization sells its items in more than 200 nations over the globe. In spite of the fact that confronted with rivalry from different organizations on the planet, Adidas has stayed to be remarkable through the proceeded with show of inventiveness in structure and creation of its items (Bajak 2010). Outside Analysis As referenced before, there is a development in the worldwide donning industry, which has pulled in numerous players in the worldwide sportswear industry wherein Adidas works. As rivalry stays with mounting a should continue putting resources into its qualities and breaking point its shortcomings by benefiting from the open doors that win in the business condition. As the worldwide brandishing industry continues growing, sportswear organizations keep coming up in order to fulfill the needs and profit by the business openings in the business (Slack 2004). Qualities The quality of an organization inside the business lies in a w ide assortment of improvements. One of the key business activities that invigorate organization and seriousness underway and the market is the brand of the organization. Through the more than 64 years of activity in the worldwide sportswear industry, Adidas has built up a solid brand in the industry.Advertising We will compose a custom report test on Strategic Audit Adidas explicitly for you for just $16.05 $11/page Learn More The logo of the organization, the three stripes and the inventiveness of the results of the organization, has given the organization a reverberating name in the business. The organization has built up an arrangement of solid brands in the worldwide market, which causes it to have a more grounded showcase position over the vast majority of its rivals (Motion, Leitch Brodie 2003). Through the solid brand portfolio, the company’s capacity to build up a solid retail impression in differing markets is improved (Joseph 2013). The brands of the Adidas Group in clude: Adidas, Rockport, Reebok, TaylorMade and Ashworth. Much the same as Nike, its greatest rival in the market, the logo and nature of items by Adidas gives the organization a serious edge over Nike and different organizations in the business. Through its image, the organization has figured out how to achieve client faithfulness over a more extensive segment of the worldwide brandishing industry. Adidas is considered by numerous individuals as a worldwide brand through its expanded interest in plan and the ensuing creation of high caliber and assorted items (Braun 2008). Client dedication is a key contributing element to the turn of events and development of the organization in the market. Having figured out how to command Europe, which is one of the world’s biggest brandishing areas, the organization has figured out how to hold the subsequent situation as far as the worldwide piece of the pie. As toward the year's end 2010, Adidas had a worldwide piece of the pie of 21%, coming next from Nike which had a normal piece of the overall industry of 30%. This is viewed as quality since the organization has not slipped from this situation for quite a while, and the level of piece of the overall industry continues rising (Bajak 2010). Other than being a maker of sportswear items, Adidas additionally adventure into the improvement of sports innovation. This makes the organization come out solid in the market. Through the endeavor in sports innovation, the organization can concoct donning instruments and gear that satisfy the cutting edge guidelines of brandishing (Bajak 2010).Advertising Searching for report on business financial matters? How about we check whether we can support you! Get your first paper with 15% OFF Find out More As one of the market chiefs in the sportswear business, Adidas profits by the economies of scale. The organization creates enormous amounts of items, which makes it simple to profit its products to a wide market. Through this, the organization places itself in a superior situation to beat other littler organizations in the market. The organization was the primary provider of footwear during the 2010 world cup (Bajak 2010). Openings Andreff and Andreff (2009) saw that the creating markets on the planet have been coming up at a fast pace, which indicates the nearness of another market for the organization. These business sectors are found in Asia, Latin America and Asia, where the donning business is being shaped so as to coordinate the brandishing business in the United States and Europe. Adidas has been checking the development in the games business in these locales. These locales structure the more up to date showcases for the organization. In the cutting edge times, various organiz ations make endeavors to utilize all the plausible way to grow their market base. The proceeded with center around the blending markets of the organization has been essential in expanding the income of the organization (Bajak 2010). The proceeded with development in data and correspondence innovation presents a ton of advertising open doors for the organization. As a major aspect of the market system activity, the organization is grasping web advertising. Web promoting is one of the foundation of showcasing that has demonstrated to be very productive for advertising improvement in a generous number of organizations on the planet today (Yaveroglu Donthu 2008). As the new markets create data and correspondence advances, the organization is rapidly coordinating this pace by upgrading internet retailing, other than the ordinary retailing in these business sectors. Data innovation, social; media, web journals and sites, offers the organization a chance to speak with its clients, subseque ntly keeping up a sound connection with them (Shimp 2010). Dangers As has been known for quite a while, the nature of the Adidas items is joined by the comparing generally significant expenses. Be that as it may, there is a ton of legitimization in both the games advertise because of the section of various little players. One eminent thing is that the new players produce comparable items, yet at a low cost. In this way, there is a high danger from the nearness of the expanded section of substitute items in the market. The present droop down of the worldwide economy likewise presents monetary dangers to the organization. This issue is aggravated by the passage of new organizations in the business, which are gaining by the financial circumstance and the craving of clients to get items at appealing costs (Newbery 2009). In the ongoing occasions, a great deal of worries about fake items have been raised by a significant number of organizations on the planet. The sportswear business is r ecorded among the enterprises that are generally influenced by fake items (Organization for Economic Co-activity and Development, 1998). Being one of the main organizations in the business, Adidas isn't a special case. The topic of fake and duplication of Adidas items was raised very quite a while in the past. As the contemporary business time is set apart by unpredictable business exercises, the organization will undoubtedly lose billions of dollars in the coming a long time because of the expanding accessibility of fake items in the market. As of now, the organization has lost a generous measure of cash because of duplication of its items and the showcasing of such items utilizing its brands. The endeavors to counter creation of phony merchandise have not borne positive outcomes yet as there

Wednesday, August 19, 2020

Preventing Alcohol Abuse Disorders

Preventing Alcohol Abuse Disorders Addiction Coping and Recovery Overcoming Addiction Print Preventing Alcohol Abuse Disorders By Buddy T facebook twitter Buddy T is an anonymous writer and founding member of the Online Al-Anon Outreach Committee with decades of experience writing about alcoholism. Learn about our editorial policy Buddy T Medically reviewed by Medically reviewed by Steven Gans, MD on February 23, 2016 Steven Gans, MD is board-certified in psychiatry and is an active supervisor, teacher, and mentor at Massachusetts General Hospital. Learn about our Medical Review Board Steven Gans, MD Updated on April 30, 2019 Getty Images More in Addiction Coping and Recovery Overcoming Addiction Methods and Support Personal Stories Alcohol Use Addictive Behaviors Drug Use Nicotine Use Alcohol abuse and alcoholism results in tremendous costs, not only to individuals and their families but to society in general. It is estimated that the annual cost of alcohol abuse in the United States runs into hundreds of billions of dollars. For the individual, excessive drinking can not only lead to alcoholism but can contribute to many other diseases and mental and behavioral disorders. It can lead to injuries, social harm, family disruption, unemployment, legal and financial problems. Alcohol abuse leads to higher healthcare and related cost to the individual and to society. It results in lost productivity and lost years of lives, and many other related costs. The most effective way to deal with the costs of alcohol use disorders to society is to prevent individuals from developing abusive drinking patterns. This can prove difficult because people start drinking for different reasons and under many different circumstances. Naturally, many of the prevention efforts in place today are aimed at youth, because that is when most people first begin to drink in our culture, and if they do begin drinking early, they are much more likely to develop severe substance abuse problems later in life. Defining High-Risk Drinking Patterns One of the major prevention efforts, aimed at all of society, launched in recent years was the development by the National Institute on Alcohol Abuse and Alcoholism (NIAAA) of specific guidelines for high-risk drinking. Those guidelines call for no more than 14 standard drinks per week and no more than four per day for men; no more than seven per week and three per day for women. NIAAA-sponsored research provided evidence that any alcohol consumption beyond those guidelines results in higher risk for alcohol-related and other problems. In releasing those guidelines, the NIAAA hoped that just by knowing what level of drinking was risky would help many drinkers curtail their unhealthy drinking patterns. Prevention Programs for Youth Alcohol is still by far the drug of choice for adolescents in the United States. To curtail underage drinking requires a massive effort to try to change their family and/or community dynamics to prevent, or at least delay, their use of alcohol. Current prevention efforts include those that monitor their activities and decrease their access to alcohol. Some of those efforts include enforcement of the legal drinking age laws, media campaigns targeting youth, increasing taxes on alcohol, reducing youth exposure to alcohol advertising and development of comprehensive community-based programs. School-Based Interventions Naturally, a key part of community-based prevention programs for youth includes school-based intervention programs. Research has found that the most effective of these programs have the following characteristics: Correct the myth that everybody is drinking.Teach youngsters ways to say no to alcohol.Use interactive teaching techniques.Involve parents and other segments of the community.Revisit the topic over the years to reinforce messages.Provide training and support for teachers and students.Are culturally and developmentally on target. Comprehensive Community Programs Researchers have found that school-based interventions work best when there is a comprehensive community prevention effort in place. Successful community programs include limiting alcohol sales to minors, increasing enforcement of underage drinking laws, and changing alcohol policies at community events, as well as increasing public awareness of problems associated with underage drinking. Family-Focused Interventions for Youth Many studies have found that children with strong family bonds and have parents actively involved in their lives are less likely to begin underage drinking. Consequently, prevention programs that focus on parenting practices, parent-child communication and bonding, and effective family management have been shown to be most effective in preventing youth drinking. College Drinking and Prevention If a child today manages to make it through high school without drinking, there are greater challenges ahead if they go to college. College binge drinking continues to be a major concern for schools and parents. Early research showed that the best college drinking prevention efforts included: Brief motivation intervention approachesCognitive-behavioral interventionsChanging students expectations about alcohol Again, dispelling the myth that everyone is binge drinking, has been found effective in reducing college binge drinking. But, recent research has disputed the effectiveness of some of these prevention efforts, including brief intervention, especially if those interventions are delivered online. Interventions in the Workplace The workplace is an opportunity to reach problem drinkers with prevention programs they might not otherwise be exposed to in society. Employers can reduce lost productivity and rising medical expenses by initiating employee assistance programs. One of most effective of these programs, according to the NIAAA, include lifestyle campaigns that encourage workers to ease stress, improve nutrition and exercise, and reduce risky behaviors such as drinking, smoking, and drug use. Prevention in the Military In the military, high-risk, lengthy and frequent deployments have been found to increase risks for developing heavy alcohol use. In fact, the rates of heavy drinking in military personnel ages 18 to 35 are 60% higher than the general population in that age group. Military prevention efforts have included reducing the availability of alcohol around military bases. These efforts include: checking for I.D., making sure alcohol retailers do not serve minors, increasing drunk driving checkpoints, increasing community-based awareness, and promoting alternative activities that do not include alcohol. Government Policy and Laws about Alcohol To a certain extent, government action can prevent alcohol abuse on a larger scale than other interventions, because they affect a wider range of people. Policies and laws can affect alcohols availability and the negative consequences of its use. Some of the laws and policies that have had the greatest impact include lowering the legal limit for drunk driving to 0.08, immediate suspension of drivers licenses for higher BAC recordings, raising the minimum drinking age, and enacting zero-tolerance laws for underage drivers. Effects of Alcohol Prices Another area in which government can play a role in alcohol abuse prevention is in raising taxes on alcohol. Research has shown that increased prices for alcoholic beverages result in decreased consumption. The increased alcohol taxes reduces drinking not only in the general population but in high-risk groups like heavy drinkers, adolescents, and young adults. More Alcohol Prevention Policies Local governments have more tools they can utilize to reduce the availability and negative consequences of alcohol use, that have been shown effective: Enforcing the minimum drinking ageMonitoring of alcohol outlet densitiesLimits on the hours and days of alcohol sales Reducing the Costs to Society Using these evidence-based approaches to prevention can reduce the high costs of alcohol use disorders to individuals and to society. Communities, schools, and workplaces have the ability to reach risky drinkers with these messages and strategies. Meanwhile, the NIAAA is continuing to fund research into the development of new approaches to delivering effective preventive efforts.

Sunday, May 24, 2020

Similarities Between Ancient Egypt And Ancient Greece

Ancient Egypt (3000 BCE – 30 BCE) and Ancient Greece (1200 BCE – 146 BCE) based their entire lives around their religious beliefs. These beliefs led to their religious practices which were included in every aspect of their lives. Since ancient Greece’s and ancient Egypt’s beliefs differ greatly, endless differences can be shown between their religious practices. However, between the two cultures, many surprising similarities can be seen in these religious practices despite the tremendous differences. Through learning about where their religious beliefs and practices started, the bigger picture of history in general can be learned. As well, the similarities between ancient Greece’s and ancient Egypt’s religious practices can be seen as not†¦show more content†¦In ancient Egypt, food offerings were made to the dead. In ancient Greece, pictures of feasts and their favorite things along with food were offered. The overall funeral betwe en the two cultures was very similar in the way things were conducted, however grievers were different. In ancient Greece, people wore black robes and women cut their cheeks and hair to show their grief. In ancient Egypt, people showed their grief through the floral collars they wore . While the beliefs of the afterlife and funerals don’t differ tremendously between the two places, the way they handled the actual body did. In ancient Greece, they buried the dead so the dead who had good hearts would be ensured to make it to the good parts of the afterlife. In ancient Egypt, they used their advanced technologies to preserve bodies through mummification, so the dead could come out of the dead to accept offerings and essentially live forever. Sometimes, afterlife religious practices involved sacrifices which were found in different parts of life leading to the next idea. Sacrifices included many things such as various animals, food, the occasional human, and more. In both soc ieties, sacrifices were considered one of the most important ritual. Greeks sacrificed to honor the gods, thank the gods, or to request a favor from the gods. Egyptians sacrificed to the gods to mainly achieve a power or protection. Similarly in both times, sacrifices startedShow MoreRelatedEssay about Ancient Egypt and Ancient Greece903 Words   |  4 Pagesâ€Å"Ancient Egypt and Ancient Greece† According to history there existed two of many important ancient civilizations that left a significant mark in the history of human development that even today leaves modern society in awe of its greatness. 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Ancient Egyptians and Ancient Greeks had similar creation storiesRead MoreAncient Greek Architecture : The Doric Style And The Ionic Design Essay1610 Words   |  7 PagesThere are three types of columns found in ancient Greek architecture but two of the three columns are: The Doric style and the Ionic design The Doric style is rather sturdy and its top (the capital), is plain. This style was used in mainland Greece and the colonies in southern Italy and Sicily. The Ionic style is thinner and more elegant. Its capital is decorated with a scroll-like design (a volute). This style was found in eastern Greece and the isl ands. 2). The ushabti (also called shabti or shawabtiRead More Exploring The Four Ancient Civilizations- Mesopotamia, Egypt, Greece and Israel1009 Words   |  5 Pagespeople from across the land gradually developed numerous cultures, each unique in some ways while the same time having features in common. 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The political and socialRead MoreThe Myth Of The Universe1565 Words   |  7 Pageswere created (El-Asward, Garry, El-Shamy, 2005, p.24-31). A major similarity in each of the different creation stories is the idea of water as the elemental source of life. For example, in ancient Egypt a hill emerges from the waters in the beginning, ancient Mesopotamia describes water as the first element, and ancient Greece saw Chaos as the first element and out of Chaos arises Gaia (earth). Chaos is another commonality between each of the creation myths. Nearly all of the great creation mythsRead MoreWomen in Ancient Egypt and Greece1311 Words   |  6 PagesWomen in Ancient Egypt and Greece By Morgan L. Harvey Throughout history women have faced many struggles in gaining equality with men. Freedoms and boundaries have been dependent upon the time period, rulers, religions and civilization. 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Each of these civilizations were built from the ground up, and they developed their own culture, practices, religions, and architectures. Although these two civilizations are similar in having this development, they differ significantly in each of these aspects of life. In this essay, we will observe the similarities and differences of Greek and Egyptian

Wednesday, May 13, 2020

Comparison Of Theoretical Strategies For Business Process...

Construct a fully referenced literature review to compare and contrast theoretical strategies for business process improvement and successful change management. All reports must include references to Six Sigma and Lean. I – INTRODUCTION Over multiple years, humans have evolved in many different ways, allowing them to adapt to their environment. Intellectually or physically mankind has shown facilities to conquer new grounds of reworking themselves towards better outcomes. In the business world, where theories and strategies combine, helpfully guiding those thrilling for adventures. Theories are an intriguing way of trying new experiments and setting an analysis, which might end up being true or shown to be false. Business Process Improvement (BPI) is a strategic way of planning in order to foresee which sector of a business has the potential to be encouraged or improved, leading to an overall business growth. As evolution can be a constant threat and opportunity in the business world, it is a merger role for managers to be aware and adapt their structure for improvement in order to compete with rival firms. As W. Edwards says, â€Å"It is not necessary to change. Survival is not mandatory†. (Jacobson, 2015) O n the other hand, Successful Change Management (SCM) is a kind of approach to redirect a process within an organisation or the organisation itself towards its allocation of resources, budget, modes of operations etc. It reshapes the company through a more efficientShow MoreRelatedManaging Liability Risk After Merger1355 Words   |  6 Pagesthe query by doing comparison of corporate strategy of mergers. Factors that lead to merger failures are misgauging strategic fit, cultural clash, communication gap, weak leadership and economic crisis by providing clear vision and putting together professional leadership team that focused management on success and winning the people’s commitment. It explains the failure of integration providing lesson that can be applied to corporation that are making change in management. Screening and analysisRead Morecapsim report4555 Words   |  19 Pageshaving differentiated products, services or business models. Hence an innovative strategy is highly recommended in order to achieve high business growth, in case you are willing to expose you to a higher degree of risk. Being successful with an innovative strategy requires a multidimensional approach and an integrative strategic management. This content is highlighted from a theoretical point of view and confirmed by my personal experiences in the business simulation game capsim. However the financialRead MoreBenefits of Strategic Management Essays2974 Words   |  12 Pagesthat engage in strategic management generally out-perform those that do not The connotation of the ancient Greek word strategos, in its various grammatical forms, implies meaning of skilful manoeuvouring leading to achieving a highly crucial position or attaining a desired end. Commonly associated with the military operations, strategies aim at methodical out-performance of adversaries. Analogically, application of deliberate strategies in the business management context suggests combinationRead More Benefits of strategic management Essay2960 Words   |  12 Pagesorganisations that engage in strategic management generally out-perform those that do not† The connotation of the ancient Greek word â€Å"strategos†, in its various grammatical forms, implies meaning of skilful manoeuvouring leading to achieving a highly crucial position or attaining a desired end. Commonly associated with the military operations, strategies aim at methodical out-performance of adversaries. Analogically, application of deliberate strategies in the business management context suggests combinationRead MoreMarketing Strategies For An Organization2060 Words   |  9 PagesMarketing Strategies Task 1: Explain the importance of the role of marketing in an organisation. Marketing is one of the most very important roles of an organisation. It is used to get the business, product or its service out into the market and to be recognised for potential customers to see. Marketing is the management process for identifying anticipating, satisfying and anticipating customer requirements profitably (CIM definition). For a service or product to be successful, in some way be someRead MoreEssay about Michael Porter’s Theory1568 Words   |  7 Pagestheory are its comprehensiveness, the dynamic Diamond theoretical system and analysis form both inductive and deductive sides. Meanwhile, it is at a disadvantage in its assumption. Thus, this essay will explore both sides of Porter’s theory. Porters model includes four key elements. The Diamond model is depicted as figure 1, where the four forces jointly constitute a firms global competitiveness in a given industry ( Porter,1990) Firm strategy, structure, and rivalry Demand conditions FactorRead MoreComparative Analysis of Business Analysis and Business Process Management Capabilities6455 Words   |  26 PagesA COMPARATIVE ANALYSIS OF BUSINESS ANALYSIS (BA) AND BUSINESS PROCESS MANAGEMENT (BPM) CAPABILITIES Paul Mathiesen, Faculty of Science and Technology, Queensland University of Technology, Brisbane, Australia, p.mathiesen@connect.qut.edu.au Wasana Bandara, Faculty of Science and Technology, Queensland University of Technology, Brisbane, Australia, w.bandara@qut.edu.au Houra Delavari, Faculty of Science and Technology, Queensland University of Technology, Brisbane, Australia, h.delavari@qutRead MoreHuman Resource Management And Organizational Planning2007 Words   |  9 Pagesresource (HR) planning requires appropriate strategy formulation as well as implementation of those strategies to achieve organizational objectives (Bratton and Gold, 2012). The statement in the task made by Torrington, Hall, Taylor and Atkinson in their book named ‘Human Resource Management’ published under Pearson education focuses on the implementation stage of the HR strategies by the organizations and entrepreneurs. The statement â€Å"Human resource strategies can be stimulating to produce and satisfyingRead MoreCase Study : Developing Successful Business3492 Words   |  14 Pages Assignment On â€Å"Developing Successful Business† Executive Summary Team effort and team bonding is a key factor for the achievement of a goals. In the managerial level there are many problems. The team effort can be helpful to eradicate them. The team leaders should nurture the employees in achieving the competitive advantages than the related organizations. The managers or the team leaders must assists and encourage the team members in case of achieving the goals. It is the teamRead MoreTotal Quality Management and Core Process Reengineering6858 Words   |  28 Pagesrestructure their business practices and become more customer-focused. All recent business approaches and techniques have generally aimed at improving performance, increasing profits, gaining market share, and most importantly satisfying the customer who has become more educated and more demanding than ever. In the last two decades two organizational development models have dominated the business world for a considerable period of time namely Total Quality Management (TQM) and Core Pr ocess Reengineering

Wednesday, May 6, 2020

The Theory of Financial Intermediation Free Essays

string(148) " and explains a great variety in the behavior of financial intermediaries in the market in their relation to savers and to investors/entrepreneurs\." THE THEORY OF FINANCIAL INTERMEDIATION: AN ESSAY ON WHAT IT DOES (NOT) EXPLAIN by Bert Scholtens and Dick van Wensveen SUERF – The European Money and Finance Forum Vienna 2003 CIP The Theory of Financial Intermediation: An Essay On What It Does (Not) Explain by Bert Scholtens, and Dick van Wensveen Vienna: SUERF (SUERF Studies: 2003/1) ISBN 3-902109-15-7 Keywords: Financial Intermediation, Corporate Finance, Assymetric Information, Economic Development, Risk Management, Value Creation, Risk Transformation. JELclassificationnumbers: E50,G10,G20,L20,O16  © 2003 SUERF, Vienna Copyright reserved. Subject to the exception provided for by law, no part of this publication may be reproduced and/or published in print, by photocopying, on microfilm or in any other way without the written consent of the copyright holder(s); the same applies to whole or partial adaptations. We will write a custom essay sample on The Theory of Financial Intermediation: or any similar topic only for you Order Now The publisher retains the sole right to collect from third parties fees payable in respect of copying and/or take legal or other action for this purpose. THE THEORY OF FINANCIAL INTERMEDIATION AN ESSAY ON WHAT IT DOES (NOT) EXPLAIN+ by Bert Scholtens* Dick van Wensveen†  Also read: Theories Seen in Ojt Abstract This essay reflects upon the relationship between the current theory of financial intermediation and real-world practice. Our critical analysis of this theory leads to several building blocks of a new theory of financial intermediation. Current financial intermediation theory builds on the notion that intermediaries serve to reduce transaction costs and informational asymmetries. As developments in information technology, deregulation, deepening of financial markets, etc. end to reduce transaction costs and informational asymmetries, financial intermediation theory shall come to the conclusion that intermediation becomes useless. This contrasts with the practitioner’s view of financial intermediation as a value-creating economic process. It also conflicts with the continuing and increasing economic importance of financial intermediaries. From this paradox, we conclude that current financial intermediation theory fails to provide a satisfactory understanding of the exi stence of financial intermediaries. We wish to thank Arnoud Boot, David T. Llewellyn, Martin M. G. Fase and Robert Merton for their help and their stimulating comments. However, all opinions reflect those of the authors and only we are responsible for mistakes and omissions. * Associate Professor of Financial Economics at the University of Groningen; PO Box 800; 9700AVGroningen;TheNetherlands(correspondingauthor). †  Professor of Financial Institutions at the Erasmus University of Rotterdam; PO Box 1738; 3000 DR Rotterdam; The Netherlands, (former Chairman of the Managing Board of MeesPierson). We present building blocks for a theory of financial intermediation that aims at understanding and explaining the existence and the behavior of real-life financial intermediaries. When information asymmetries are not the driving force behind intermediation activity and their elimination is not the commercial motive for financial intermediaries, the question arises which paradigm, as an alternative, could better express the essence of the intermediation process. In our opinion, the concept of value creation in the context of the value chain might serve that purpose. And, in our opinion, it is risk and risk management that drives this value creation. The absorption of risk is the central function of both banking and insurance. The risk function bridges a mismatch between the supply of savings and the demand for investments as savers are on average more risk averse than real investors. Risk, that means maturity risk, counterparty risk, market risk (interest rate and stock prices), life expectancy, income expectancy risk etc. , is the core business of the financial industry. Financial intermediaries can absorb risk on the scale required by the market because their scale permits a sufficiently diversified portfolio of investments needed to offer the security required by savers and policyholders. Financial intermediaries are not just agents who screen and monitor on behalf of savers. They are active counterparts themselves offering a specific product that cannot be offered by individual investors to savers, namely cover for risk. They use their reputation and their balance sheet and off-balance sheet items, rather than their very limited own funds, to act as such counterparts. As such, they have a crucial function within the modern economy. TABLE OF CONTENTS 1. Introduction7 2. The Perfect Model9 3. Financial Intermediaries in the Economy11 4. Modern Theories of Financial Intermediation15 5. Critical Assessment21 6. An Alternative Approach of Financial Intermediation31 7. Building Blocks for an Amended Theory37 8. A New Research Agenda41 References45 Appendix A53 Tables 1. Share of Employment in Financial Services in Total Employment (percentages)12 2. Share of Value-Added in Financial Services in GDP (percentages)12 3. Financial Intermediary Development over Time for About 150 Countries (percentages)12 4. (Stylized) Contemporary and Amended Theory of Financial Intermediation38 SUERF56 SUERF Studies57 1. Introduction When a banker starts to study the theory of financial intermediation in order to better understand what he has done during his professional life, he enters a world unknown to him. That world is full of concepts which he did not, or hardly, knew before and full of expressions he never used himself: asymmetric information, adverse selection, monitoring, costly state verification, moral hazard and a couple more of the same kind. He gets the uneasy feeling that a growing divergence has emerged between the micro- economic theory of banking, as it took shape in the last three decades, and the everyday behavior of bankers according to their business motives, expressed in the language they use. This essay tries to reflect on the merits of the present theory of financial intermediation, on what it does and does not explain from both a practical and a theoretical point of view. The theory is impressive by the multitude of applications in the financial world of the agency theory and the theory of asymmetric information, of adverse selection and moral hazard. As well as by their relevance for important aspects of the financial intermediation process, as is shown in an ever-growing stream of economic studies. But the study of all these theories leaves the practitioner with the impression that they do not provide a satisfactory answer to the basic question; which forces really drive the financial intermediation process? The current theory shows and explains a great variety in the behavior of financial intermediaries in the market in their relation to savers and to investors/entrepreneurs. You read "The Theory of Financial Intermediation:" in category "Essay examples" But as far as the authors of this essay are aware, it does not, or not yet, provide a satisfactory answer to the question of why real-life financial institutions exist, what keeps them alive and what is their essential contribution to (inter)national economic welfare. We believe that this question cannot be addressed by a further extension of the present theory, by the framework of the agency theory and the theory of asymmetric information. The question goes into the heart of the present theory, into the paradigm on which it is based. This paradigm is the famous classical idea of the perfect market, introduced by Marshall and Walras. Since then, it has been the leading principle, the central point of reference in the theory of competition, the neoclassical growth theory, the portfolio theory and also the leading principle of the present theory of financial intermediation. Financial intermediaries, according to that theory, have a function only because financial markets are not perfect. They exist by the grace of market 7 8Introduction imperfections. As long as there are market imperfections, there are intermediaries. As soon as markets are perfect, intermediaries are redundant; they have lost their function because savers and investors dispose of the perfect information needed to find each other directly, immediately and without any impediments, so without costs, and to deal at optimal prices. This is the general equilibrium model a la Arrow-Debreu in which banks cannot exist. Obviously, this contrasts with the huge economic and social importance of financial intermediaries in highly developed modern economies. Empirical observations point at an increasing role for financial intermediaries in economies that experience vastly decreasing information and transaction costs. Our essay goes into this paradox and comes up with an amendment of the existing theory of financial intermediation. The structure of this paper is as follows. First, we introduce the foundations of the modern literature of financial intermediation theory. From this, we infer the key predictions with respect to the role of the financial intermediary within the economy. In Section 3, we will investigate the de facto role of financial intermediaries in modern economies. We discuss views on the theoretical relevance of financial intermediaries for economic growth. We also present some stylized facts and empirical observations about their current position in the economy. The mainstream theory of financial intermediation is briefly presented in Section 4. Of course, we cannot pay sufficient attention to all developments in this area but will focus on the basic rationales for financial intermediaries according to this theory, i. . information problems, transaction costs, and regulation. Section 5 is a critical assessment of this theory of financial intermediation. An alternative approach of financial intermediation is unfolded in Section 6. In Section 7, we present the main building blocks for an alternative theory of financial intermediation that aims at understanding and explaining the behavior of real-life financial intermediaries. Here, we argue that risk management is the core issue in understanding this behavior. Transforming risk for ultimate savers and lenders and risk management by the financial intermediary itself creates economic value, both for the intermediary and for its client. Accordingly, it is the transformation and management of risk that is the intermediaries’ contribution to the economic welfare of the society it operates in. This is – in our opinion – the hidden or neglected economic rationale behind the emergence and the existence and the future of real-life financial intermediaries. In Section 8, we conclude our essay with a proposal for a research agenda for an amended theory of financial intermediation. 2. The Perfect Model Three pillars are at the basis of the modern theory of finance: optimality, arbitrage, and equilibrium. Optimality refers to the notion that rational investors aim at optimal returns. Arbitrage implies that the same asset has the same price in each single period in the absence of restrictions. Equilibrium means that markets are cleared by price adjustment – through arbitrage – at each moment in time. In the neoclassical model of a perfect market, e. g. the perfect market for capital, or the Arrow-Debreu world, the following criteria usually must be met: –no individual party on the market can influence prices; – conditions for borrowing/lending are equal for all parties under equal circumstances; –there are no discriminatory taxes; –absence of scale and scope economies; –all financial titles are homogeneous, divisible and tradable; – there are no information costs, no transaction costs and no insolvency costs; –all market parties have ex ante nd ex post immediate and full information on all factors and events relevant for the (future) value of the traded financial instruments. The Arrow-Debreu world is based on the paradigm of complete markets. In the case of complete markets, present value prices of investment projects are well defined. Savers and investors find each other because they have perfect information on each others prefer ences at no cost in order to exchange savings against readily available financial instruments. These instruments are constructed and traded costlessly and they fully and simultaneously meet the needs of both savers and investors. Thus, each possible future state of the world is fully covered by a so-called Arrow-Debreu security (state contingent claim). Also important is that the supply of capital instruments is sufficiently diversified as to provide the possibility of full risk diversification and, thanks to complete information, market parties have homogenous expectations and act rationally. In so far as this does not occur naturally, intermediaries are useful to bring savers and investors together and to create instruments that meet their needs. They do so with reimbursement of costs, but costs are by definition an element – or, rather, characteristic – of market imperfection. Therefore, intermediaries are at best tolerated and would be eliminated in a move towards market perfection, with all intermediaries becoming 9 10The Perfect Model redundant: the perfect state of disintermediation. This model is the starting point in the present theory of financial intermediation. All deviations from this model which exist in the real world and which cause intermediation by the specialized financial intermediaries, are seen as market imperfections. This wording suggests that intermediation is something which exploits a situation which is not perfect, therefore is undesirable and should or will be temporary. The perfect market is like heaven, it is a teleological perspective, an ideal standard according to which reality is judged. As soon as we are in heaven, intermediaries are superfluous. There is no room for them in that magnificent place. Are we going to heaven? Are intermediaries increasingly becoming superfluous? One would be inclined to answer both questions in the affirmative when looking to what is actually happening: Increasingly, we have to make do with liberalized, deregulated financial markets. All information on important macroeconomic and monetary data and on the quality and activities of market participants is available in ‘real time’, on a global scale, twenty-four hours a day, thanks to the breathtaking developments in information and communication technology. Firms issue shares over the Internet and investors can put their order directly in financial markets thanks to the virtual reality. The communication revolution also reduces information costs tremendously. The liberalization and deregulation give, moreover, a strong stimulus towards the securitization of financial instruments, making them transparent, homogeneous, and tradable in the international financial centers in the world. Only taxes are discriminating, inside and between countries. Transaction costs are still there, but they are declining in relative importance thanks to the cost efficiency of ICT and efficiencies of scale. Insolvency and liquidity risks, however, still are an important source of heterogeneity of financial titles. Furthermore, every new crash or crisis invokes calls for additional and more timely information. For example, the Asia crisis resulted in more advanced and verifiable and controllable international financial statistics, whereas the Enron debacle has put the existing business accounting and reporting standards into question. There appears to be an almost unstoppable demand for additional information. 3. Financial Intermediaries in the Economy So, we are making important progress in our march towards heaven and what happens? Is financial intermediation fading away? One might think so from the forces shaping the current financial environment: deregulation and liberalization, communication, internationalization. But what is actually happening in the real world? Do we really witness the demise of the financial institutions? Are the intermediaries about to vanish from planet Earth? On the contrary, their economic importance is higher than ever and appears to be increasing. This is the case even during the 1990s when markets became almost fully liberalized and when communication on a global scale made a real and almost complete breakthrough. The tendency towards an increasing role of financial intermediation is illustrated in Tables 1 and 2 that give the relative contribution of the financial sector to the two key items of economic wealth and welfare in most nations, i. e. GDP and labor. These tables show that, even in highly developed markets, financial intermediaries tend to play a substantial and increasing role in the current economy. Furthermore, Demirguc-Kunt and Levine (1999) among others, conclude that claims of deposit money banks and of other financial institutions on the private sector have steadily increased as a percentage of GDP in a large number of countries (circa 150), rich and poor, between the 1960s and 1990s. The pace of increase is not declining in the 1990s. This is reflected in Table 3. In the 1960s, Raymond Goldsmith (1969) gave stylized facts on financial structure and economic development (see appendix A). He found that in the course of economic development, a country’s financial system grows more rapidly than national wealth. It appears that the main determinant of the relative size of a country’s financial system is the separation of the functions of saving and investing among different (groups of) economic units. This observation sounds remarkably modern. Since the early 1990s, there has been growing recognition for the positive impact of financial intermediation on the economy. Both theoretical and empirical studies find that a well-developed financial system is beneficial to the economy as a whole. Basically the argument behind this idea is that the efficient allocation of capital within an economy fosters economic growth (see Levine, 1997). Financial intermediation can affect economic growth by acting on the saving rate, on the fraction of saving channeled to investment or on the social marginal productivity of investment. In general, financial development will be positive for economic growth. But some improvements in risk-sharing and in the 11 12Financial Intermediaries in the Economy credit market for households may decrease the saving rate and, hence, the growth rate (Pagano, 1993). Table 1: Share of Employment in Financial Services in Total Employment (percentages) Source: OECD, National Accounts (various issues) Table 2: Share of Value-Added in Financial Services in GDP (percentages) Source: OECD, National Accounts (various issues) Table 3: Financial Intermediary Development over Time for About 150 Countries (percentages) Source: Demirguc-Kunt and Levine (1999, Figure 2A) 1970 1980 1985 1990 1995 2000 Canada 2. 4 2. 7 2. 9 3. 0 3. 2 3. 1 France 1. 8 2. 6 2. 9 2. 8 2. 7 2. 8 Germany 2. 2 2. 8 3. 0 3. 1 3. 3 3. 3 Japan 2. 4 3. 0 3. 2 3. 3 3. 4 3. 5 Switzerland – – 4. 6 4. 8 4. 8 4. 9 United Kingdom – 3. 0 3. 5 4. 6 4. 4 4. 4 United States 3. 8 4. 4 4. 7 4. 8 4. 8 4. 8 1970 980 1985 1990 1995 2000 Canada 2. 2 1. 8 2. 0 2. 8 2. 9 3. 1 France 3. 5 4. 4 4. 8 4. 4 4. 6 4. 8 Germany 3. 2 4. 5 5. 5 4. 8 5. 8 5. 7 Japan 4. 3 4. 5 5. 5 4. 8 5. 6 5. 3 Netherlands 3. 1 4. 0 5. 3 5. 6 5. 5 5. 8 Switzerland – – 10. 4 10. 3 13. 1 12. 8 United States 4. 0 4. 8 5. 5 6. 1 7. 2 7. 1 1960s 1970s 1980s 1990s Liquid liabilities/GDP 32 39 47 51 Claims by deposit money banks on pri vate sector/GDP 20 24 32 39 Financial Intermediaries in the Economy13 There are different views on how the financial structure affects economic growth exactly (Levine, 2000). The bank-based view holds that bank-based systems – particularly at early stages of economic development – foster economic growth to a greater degree than market-based systems. ? The market-based view emphasizes that markets provide key financial services that stimulate innovation and long-run growth. ? The financial services view stresses the role of banks and markets in researching firms, exerting corporate control, creating risk management devices, and mobilizing society’s savings for the most productive endeavors in tandem. As such, it does regard banks and markets as complements rather than substitutes as it focuses on the quality of the financial services produced by the entire financial system. ? The legal-based view rejects the analytical validity of the financial structure debate. It argues that the legal system shapes the quality of financial services (for example La Porta et al. , 1998). The legal-based view stresses that the component of financial development explained by the legal system critically influences long-run growth. Political factors have been introduced too, in order to explain the relationship between financial and economic development (see Fohlin, 2000; Kroszner and Strahan, 2000; Rajan and Zingales, 2000). From empirical research of the relationship between economic and financial development, it appears that history and path-dependency weigh very heavy in determining the growth and design of financial institutions and markets. Furthermore, idiosyncratic shocks that surprise institutions and markets over time appear to be quite important. Despite obvious connections among political, legal, economic, and financial institutions and markets, long-term causal relationships often prove to be elusive and appear to depend upon the methodology chosen to study the relationship. 1 But it is important to realize that efficient financial intermediation confers two important benefits: it raises 1 For example, see Berthelemy and Varoudakis, 1996; Demetriades and Hussein, 1996; Kaplan and Zingales, 1997; Sala-i-Martin, 1997; Fazzari et al. , 1988; Levine and Zervos, 1998; Demirguc-Kunt and Levine, 1999; Filer et al, 1999; Beck and Levine, 2000; Beck et al. 2000; Benhabib and Spiegel, 2000; Demirguc-Kunt and Maksimovic, 2000; Rousseau and Wachtel, 2000; Arestis et al. , 2001; Wachtel, 2001. 14Financial Intermediaries in the Economy the level of investment and savings, and it increases the efficiency in the allocation of financial funds in the economic system. There is a structural tendency in the composition of national wealth repres ented in financial titles in many countries, especially the Anglo Saxon, towards the substitution of bank held assets (bank loans etc. ) by securitized assets held by the public (equity, bonds) (Ross, 1989). This substitution is often interpreted as a proof of the disintermediation process (e. g. Allen and Santomero, 1997). However, this substitution does not imply that bank loans are not growing any more. To the contrary, they continue to grow, even in the U. S. where the substitution is most visible (see Boyd and Gertler, 1994; Berger et al. , 1995). Therefore, this substitution may not be interpreted as a sign of a diminishing role of banking in general. This is because it is the banks that play an essential role in the securitized instruments. They initiate, arrange and underwrite the floating of these instruments. They often maintain a secondary market. They invent a multitude of off-balance instruments derived from securities. They provide for the clearing of the deals. They are the custodians of these constructions. They provide stock lending and they finance market makers in options and futures. Thus, banks are crucial drivers of financial innovation. Furthermore, it is still an unsolved question of how the off-balance instruments should be counted in the statistics of national wealth. Their huge notional amounts do not reflect the constantly varying values for the contracting parties. Banks are moving in an off-balance direction and their purpose is increasingly to develop and provide tradable and non-tradable risk management instruments. And other kinds of financial intermediaries play an increasingly important role in the same direction, both in securitized and non-tradable instruments, both on- and off-balance: insurance companies, pension funds, investments funds, market makers at stock exchanges and derivative markets. These different kinds of financial intermediaries transform risk (concerning future income or accidents or interest rate fluctuations or stock price fluctuations, etc. ). Risk transformation and risk management is their job. Thus, despite the globalization of financial services, driven by deregulation and information technology ,and despite strong price competition, the financial services industry is not declining in importance but it is growing. This seems paradoxical. It points to something important which the modern financial intermediation theory, and the neo-classical market theory on which it is based, do not explain. Might it be the case that it overlooks something crucial? Something that is to be related to information production but that is, so far, not uncovered by the theory of financial intermediation? 4. Modern Theories of Financial Intermediation In order to give firm ground to our argument and to illustrate the paradox, we will first review the doctrines of the theory of financial intermediation. 2 These are specifications, relevant to the financial services industry, of the agency theory, and the theory of imperfect or asymmetric information. Basically, we may distinguish between three lines of reasoning that aim at explaining the raison d’etre of financial intermediaries: information problems, transaction costs and regulatory factors. First, and that used in most studies on financial intermediation, is the informational asymmetries argument. These asymmetries can be of an ex ante nature, generating adverse selection, they can be interim, generating moral hazard, and they can be of an ex post nature, resulting in auditing or costly state verification and enforcement. The informational asymmetries generate market imperfections, i. . deviations from the neoclassical framework in Section 2. Many of these imperfections lead to specific forms of transaction costs. Financial intermediaries appear to overcome these costs, at least partially. For example, Diamond and Dybvig (1983) consider banks as coalitions of depositors that provide households with insurance against idiosyncratic shocks that adversely affect their liqui dity position. Another approach is based on Leland and Pyle (1977). They interpret financial intermediaries as information sharing coalitions. Diamond (1984) shows that these intermediary coalitions can achieve economies of scale. Diamond (1984) is also of the view that financial intermediaries act as delegated monitors on behalf of ultimate savers. Monitoring will involve increasing returns to scale, which implies that specializing may be attractive. Individual households will delegate the monitoring activity to such a specialist, i. e. to the financial intermediary. The households will put their deposits with the intermediary. They may withdraw the deposits in order to discipline the intermediary in his monitoring function. Furthermore, they will positively value the intermediary’s involvement in the ultimate investment (Hart, 1995). Also, there can be assigned a positive incentive effect of short-term debt, and in particular deposits, on bankers (Hart and Moore, 1995). For example, Qi (1998) and Diamond and Rajan (2001) show that deposit finance can create 2 We have used the widely cited reviews by Allen, 1991; Bhattacharya and Thakor, 1993; Van Damme, 1994; Freixas and Rochet 1997; Allen and Gale, 2000b; Gorton and Winton, 2002, as our main sources in this section. 15 6Modern Theories of Financial Intermediation the right incentives for a bank’s management. Illiquid assets of the bank result in a fragile financial structure that is essential for disciplining the bank manager. Note that in the case households that do not turn to intermediated finance but prefer direct finance, there is still a â€Å"brokerage† role for financial intermediaries, such as investment banks (see Baron, 1979 and 1982). Here, the reputation effect is also at stake. In financing, both the reputation of the borrower and that of the financier are relevant (Hart and Moore, 1998). Dinc (2001) studies the effects of financial market competition on a bank reputation mechanism, and argues that the incentive for the bank to keep its commitment is derived from its reputation, the number of competing banks and their reputation, and the competition from bond markets. These four aspects clearly interact (see also Boot, Greenbaum and Thakor, 1993). The â€Å"informational asymmetry† studies focus on the bank/borrower and the bank/lender relation in particular. In bank lending one can basically distinguish transactions-based lending (financial statement lending, asset- based lending, credit scoring, etc. ) and relationship lending. In the former class information that is relatively easily available at the time of loan origination is used. In the latter class, data gathered over the course of the relationship with the borrower is used (see Lehman and Neuberger, 2001; Kroszner and Strahan, 2001; Berger and Udell, 2002). Central themes in the bank/borrower relation are the screening and monitoring function of banks (ex ante information asymmetries), the adverse selection problem (Akerlof, 1970), credit rationing (Stiglitz and Weiss, 1981), the moral hazard problem (Stiglitz and Weiss, 1983) and the ex post verification problem (Gale and Hellwig, 1985). Central themes in the bank/lender relation are bank runs, why they occur, how they can be prevented, and their economic consequences (Kindleberger, 1989; Bernanke, 1983; Diamond and Dybvig, 1983). Another avenue in the bank/lender relationship are models for competition between banks for deposits in relation to their lending policy and the probability that they fulfill their obligations (Boot, 2000; Diamond and Rajan, 2001). Second is the transaction costs approach (examples are Benston and Smith, 1976; Campbell and Kracaw, 1980; Fama, 1980). In contrast to the first, this approach does not contradict the assumption of complete markets. It is based on nonconvexities in transaction technologies. Here, the financial intermediaries act as coalitions of individual lenders or borrowers who exploit economies of scale or scope in the transaction technology. The notion of transaction costs encompasses not only exchange or monetary transaction costs (see Tobin, 1963; Towey, 1974; Fischer, 1983), but also search costs and monitoring and auditing costs (Benston and Smith, 1976). Here, the role of Modern Theories of Financial Intermediation17 he financial intermediaries is to transform particular financial claims into other types of claims (so-called qualitative asset transformation). As such, they offer liquidity (Pyle, 1971) and diversification opportunities (Hellwig, 1991). The provision of liquidity is a key function for savers and investors and increasingly for corporate customers, whereas the provision of diversification increa singly is being appreciated in personal and institutional financing. Holmstrom and Tirole (2001) suggest that this liquidity should play a key role in asset pricing theory. The result is that unique characteristics of bank loans emerge to enhance efficiency between borrower and lender. In loan contract design, it is the urge to be able to efficiently bargain in later (re)negotiations, rather than to fully assess current or expected default risk that structures the ultimate contract (Gorton and Kahn, 2000). With transaction costs, and in contrast to the information asymmetry approach, the reason for the existence of financial intermediaries, namely transaction costs, is exogenous. This is not fully the case in the third approach. The third approach to explain the raison d’etre of financial intermediaries is based on the regulation of money production and of saving in and financing of the economy (see Guttentag and Lindsay, 1968; Fama, 1980; Mankiw, 1986; Merton, 1995b). Regulation affects solvency and liquidity with the financial institution. Diamond and Rajan (2000) show that bank capital affects bank safety, the bank’s ability to refinance, and the bank’s ability to extract repayment from borrowers or its willingness to liquidate them. The legal-based view especially (see Section 3), sees regulation as a crucial factor that shapes the financial economy (La Porta et al. , 1998). Many view financial regulations as something that is completely exogenous to the financial industry. However, the activities of the intermediaries inherently â€Å"ask for regulation†. This is because they, the banks in particular, by the way and the art of their activities (i. e. qualitative asset transformation), are inherently insolvent and illiquid (for the example of deposit insurance, see Merton and Bodie, 1993). Furthermore, money and its value, the key raw material of the financial services industry, to a large extent is both defined and determined by the nation state, i. e. by regulating authorities par excellence. Safety and soundness of the financial system as a whole and the enactment of industrial, financial, and fiscal policies are regarded as the main reasons to regulate the financial industry (see Kareken, 1986; Goodhart, 1987; Boot and Thakor, 1993). Also, the financial history shows a clear interplay between financial institutions and markets and the regulators, be it the present-day specialized financial supervisors or the old-fashioned sovereigns (Kindleberger, 1993). Regulation of financial intermediaries, especially of banks, is costly. There are the direct costs of administration and of employing the supervisors, and 18Modern Theories of Financial Intermediation there are the indirect costs of the distortions generated by monetary and prudential supervision. Regulation however, may also generate rents for the regulated financial intermediaries, since it may hamper market entry as well as exit. So, there is a true dynamic relationship between regulation and financial production. It must be noted that, once again, most of the literature in this category focuses on explaining the functioning of the financial intermediary with regulation as an exogenous force. Kane (1977) and Fohlin (2000) attempt to develop theories that explain the existence of the very extensive regulation of financial intermediaries when they go into the dynamics of financial regulation. Thus, to summarize, according to the modern theory of financial intermediation, financial intermediaries are active because market imperfections prevent savers and investors from trading directly with each other in an optimal way. The most important market imperfections are the informational asymmetries between savers and investors. Financial intermediaries, banks specifically, fill â₠¬â€œ as agents and as delegated monitors – information gaps between ultimate savers and investors. This is because they have a comparative informational advantage over ultimate savers and investors. They screen and monitor investors on behalf of savers. This is their basic function, which justifies the transaction costs they charge to parties. They also bridge the maturity mismatch between savers and investors and facilitate payments between economic parties by providing a payment, settlement and clearing system. Consequently, they engage in qualitative asset transformation activities. To ensure the sustainability of financial intermediation, safety and soundness regulation has to be put in place. Regulation also provides the basis for the intermediaries to enact in the production of their monetary services. All studies on the reasons behind financial intermediation focus on the functioning of intermediaries in the intermediation process; they do not examine the existence of the real-world intermediaries as such. It appears that the latter issue is regarded to be dealt with when satisfactory answers on the former are being provided. Market optimization is the main point of reference 3 The importance of regulation for the existence of the financial intermediary can best be understood if one is prepared to account for the historical and institutional setting of financial intermediation (see Kindleberger, 1993; Merton, 1995b). Interestingly, and illustrating the crucial importance of regulation for financial intermediation, is that there are some authors who suggest that unregulated finance or ‘free banking’ would be highly desirable, as it would be stable and inflation-free. Proponents of this view are, among others, White, 1984; Selgin, 1987; Dowd, 1989. Modern Theories of Financial Intermediation19 in case of the functioning of the intermediaries. The studies that appear in most academic journals analyze situations and conditions under which banks or other intermediaries are making markets less imperfect as well as the impediments to their optimal functioning. Perfect markets are the benchmarks and the intermediating parties are analyzed and judged from the viewpoint of their contribution to an optimal allocation of savings, that means to market perfection. Ideally, financial intermediaries should not be there and, being there, they at best alleviate market imperfections as long as the real market parties have no perfect information. On the other hand, they maintain market imperfections as long as they do not completely eliminate informational asymmetries, and even increase market imperfections when their risk aversion creates credit crunches. So, there appears not to be a heroic role for intermediaries at all! But if this is really true, why are these weird creatures still in business, even despite the fierce competition amongst themselves? Are they truly dinosaurs, completely unaware of the extinction they will face in the very near future? This seems highly unlikely. Section 3 showed and argued that the financial intermediaries are alive and kicking. They have a crucial and even increasing role within the real-world economy. They increasingly are linked up in all kinds of economic transactions and processes. Therefore, the next section is a critical assessment of the modern theory of financial intermediation in the face of the real-world behavior and impact of financial institutions and markets. 5. Critical Assessment Two issues are of key importance. The first is about why we demand banks and other kinds of financial intermediaries. The answer to this question, in our opinion, is risk management rather than informational asymmetries or transaction costs. Economies of scale and scope as well as the delegation of the screening and monitoring function especially apply to dealing with risk itself, rather than only with information. The second issue that matters is why banks and other financial institutions are willing and able to take on the risks that are inevitably involved in their activity. In this respect, it is important to note that financial intermediaries are able to create comparative advantages with respect to information acquisition and processing in relation to their sheer size in relation to the customer whereby they are able to manage risk more efficiently. We suggest Schumpeter’s view of entrepreneurs as innovators and Merton’s functional perspective of financial intermediaries in tandem are very helpful in this respect. One should question whether the existence of financial intermediaries and the structural development of financial intermediation can be fully explained by a theoretical framework based on the neo-classical concept of perfect competition. The mainstream theory of financial intermediation, as it has been developed in the past few decades, has – without any doubt – provided numerous valuable insights into the behavior of banks and other intermediaries and their managers in the financial markets under a broad variety of perceived and observed circumstances. For example, the â€Å"agency revolution†, unleashed by Jensen and Meckling (1976), focussed on principal-agent relation asymmetries. Contracts and conflicts of interest on all levels inside and outside the firm in a world full of information asymmetries became the central theme in the analysis of financial decisions. Important aspects of financial decisions, which previously went unnoticed in the neo- classical theory, could be studied in this approach, and a â€Å"black box† of financial decision making was opened. But the power of the agency heory is also her weakness: it mainly explains ad hoc situations; new models based on different combinations of assumptions continuously extend it. 4 In nearly all 4 To this extent, one can draw a striking parallel with the traditional Newtonian view of the natural world. The planetary orbits round the Sun can be explained very well with the Newtonian laws of gravitation and force. Apparent anomalies in the orbital movement of Ne ptune turned out to be caused by the influence of an hitherto unknown planet (Pluto). Its (predicted) astronomical 21 22Critical Assessment financial decisions, information differences and, as a consequence, conflicts of interest, play a role. Focussed on these aspects, the agency theory is capable of investigating nearly every contingency in the interaction of economic agents deviating from what they would have done in a market with perfect foresight and equal incentives for all agents. However, the applications from agency theory have mainly anecdotal value; they are tested in a multitude of specific cases. But the theory fails to evolve into a general and coherent explanation of what is the basic function of financial intermediaries in the markets and the economy as a whole. Various researchers interested in real world financial phenomena have pointed out that banks in particular do make a difference. They come up with empirical evidence that banks are special. For example, Fama (1985) and James (1987) analyze the incidence of the implicit tax due to reserve requirements. Both conclude that bank loans are special, as bank CDs have not been eliminated by non-bank alternatives that bear no reserve requirements. Mikkelson and Partch (1986) and James (1987) look at the abnormal returns associated with announcements of different types of security offerings and find a positive response to bank loans. Lummer and McConnel (1989) and Best and Zhang (1993) have confirmed these results. Slovin et al. (1993) look into the adverse effect on the borrower in case a borrower’s bank fails. They find Continental Illinois borrowers incur significant negative abnormal returns during the bank’s impending failure. Gibson (1995) finds similar results when studying the effects of the health of Japanese banks on borrowers. Gilson et al. (1990) find that the likelihood of a successful debt restructuring by a firm in distress is positively related to the extent of that firm’s reliance on bank borrowing. James (1996) finds that the higher the proportion of total debt held by the bank, the higher the likelihood the bank debt will be impaired, and so the higher the likelihood that it participates in the restructuring. Hoshi et al. (1991) for Japan and Fohlin (1998) and Gorton and Schmid (1999) for Germany also find that in these countries, banks provide valuable services that cannot be replicated in capital markets. Current intermediation theory treats such observations often as an anomaly. But, in our perspective, it relates rather to the insufficient explanatory power of the current theory of financial intermediation. observation was regarded as an even greater victory for Newtonian theory. However, it took Einstein and Bohr to reveal that this theory is only a limit case as it is completely unable to deal with the behavior of microparticles (see Couper and Henbest, 1985; Ferris, 1988; Hawking, 1988). Critical Assessment23 The basic reason for the insufficient explanatory power of the present intermediation theory has, in our opinion, to be sought in the paradigm of asymmetrical information. Markets are imperfect, according to this paradigm, because the ultimate parties who operate in the markets have insufficient information to conclude a transaction by themselves. Financial intermediaries position themselves as agents (â€Å"middlemen†) between savers and investors, alleviating information asymmetries against transaction costs to a level where total savings are absorbed by real investments at equilibrium real interest rates. But in the real world, financial intermediaries do not consider themselves agents who intermediate between savers and investors by procuring information on investors to savers and by selecting and monitoring investors on behalf of savers. That is not their job. They deal in money and in risk, not in information per se. Information production predominantly is a means to the end of risk management. In the real world, borrowers, lenders, savers, investors and financial supervisors look at them in the same way, i. . risk managers instead of information producers. Financial intermediaries deal in financial services, created by themselves, mostly for their own account, via their balance sheet, so for their own risk. They attract savings from the saver and lend it to the investor, adding value by meeting the specific needs of savers and investors at prices that equilibrate the supply and demand of money. This is a creative process, which cannot be characterized by the reduction of informati on asymmetries. In the intermediation process the financial intermediary transforms savings, given the preferences of the saver with respect to liquidity and risk, into investments according to the needs and the risk profile of the investor. It might be clear that for these reasons the views of Bryant (1980) and of Diamond and Dybvig (1983) on the bank as a coalition of depositors, of Akerlof (1970) and Leland and Pyle (1977) on the bank as an information sharing coalition, and of Diamond (1984) on the bank as delegated (†¦ monitor, do not reflect at all the view of bankers on their own role. Nor does it reflect the way in which society experiences their existence. Even with perfect information, the time and risk preferences of savers and investors fail to be matched completely by the price (interest rate) mechanism: there are (too many) missing markets. It is the financial intermediary that somehow has to make do with these missing links. The financial intermediary manages risks in order to al low for the activities of other types of households within the economy. One would expect that the theory of the firm would pay ample attention to the driving forces behind entrepreneurial activity and could thus explain in more general terms the existence of financial intermediation as an entrepreneurial 24Critical Assessment activity. However, this is not the focus of that theory. The theory of the firm is preoccupied with the functioning of the corporate enterprise in the context of market structures and competition processes. In the wake of Coase (1937), the corporate enterprise is part of the market structure and can even be considered as an alternative for the market. This view laid the foundation for the transaction cost theory (see Williamson, 1988), for the agency theory (Jensen and Meckling, 1976), and for the theory of asymmetric information (see Stiglitz and Weiss, 1981 and 1983). Essential in the approaches of these theories is that the corporate enterprise is not treated as a â€Å"black box†, a uniform entity, as was the case in the traditional micro-economic theory of the firm. It is regarded as a coalition of interests operating as a market by itself and optimizing the opposing and often conflicting interests of different stakeholders (clients, personnel, financiers, management, public authorities, non-governmental organizations). The rationale of the corporate enterprise is that it creates goods and services, which cannot be produced, or only at a higher price, by consumers themselves. This exclusive function justifies transaction costs, which are seen as a form of market imperfection. The mainstream theory of the firm evolved under the paradigm of the agency theory and the transaction costs theory as a theory of economic organization rather than as a theory of entrepreneurship. A separate line of thinking in the theory of the firm is the dynamic market approach of Schumpeter (1912), who stressed the essential function of entrepreneurs as innovators, creating new products and new distribution methods in order to gain competitive advantage in constantly developing and changing markets. In this approach, markets and enterprises are in a continuous process of â€Å"creative destruction† and the entrepreneurial function is pre-eminently dynamic. Basic inventions are more or less exogenous to the economic system; their supply is perhaps influenced by market demand in some way, but their genesis lies outside the existing market structure. Entrepreneurs seize upon these basic inventions and transform them into economic innovations. The successful innovators reap large short-term profits, which are soon bid away by imitators. The effect of the innovations is to disequilibrate and to alter the existing market structure, until the process eventually settles down in wait for the next (wave of) innovation. The result is a punctuated pattern of economic development that is perceived as a series of business cycles. Financial intermediaries, the ones that mobilize savings, allocate capital, manage risk, ease transactions, and monitor firms, are essential for economic growth and development. That is what Joseph Schumpeter argued early in this century. Now there is evidence to support Schumpeter’s view: financial services promote development (see King and Critical Assessment25 Levine, 1993; Benhabib and Spiegel, 2000; Arestis et al. , 2001; Wachtel, 2001). The conceptual link runs as follows: Intermediaries can promote growth by increasing the fraction of resources society saves and/or by improving the ways in which society allocates savings. Consider investments in firms. There are large research, legal, and organizational costs associated with such investment. These costs can include evaluating the firm, coordinating financing for the firm if more than one investor is involved, and monitoring managers. The costs might be prohibitive for any single investor, but an intermediary could perform these tasks for a group of investors and lower the costs per investor. So, by researching many firms and by allocating credit to the best ones, intermediaries can improve the allocation of society’s resources. Intermediaries can also diversify risks and exploit economies of scale. For example, a firm may want to fund a large project with high expected returns, but the investment may require a large lump-sum capital outlay. An individual investor may have neither the resources to finance the entire project nor the desire to devote a disproportionate part of savings to a single investment. Thus profitable opportunities can go unexploited without intermediaries to mobilize and allocate savings. Intermediaries do much more than passively decide whether to fund projects. They can initiate the creation and transformation of firms’ activities. Intermediaries also provide payment, settlement, clearing and netting services. Modern economies, replete with complex interactions, require secure mechanisms to settle transactions. Without these services, many activities would be impossible, and there would be less scope for specialization, with a corresponding loss in efficiency. In addition to improving resource allocation, financial intermediaries stimulate individuals to save more efficiently by offering attractive instruments that combine attributes of depositing, investing and insuring. The securities most useful to entrepreneurs – equities, bonds, bills of exchange – may not have the exact liquidity, security, and risk characteristics savers desire. By offering attractive financial instruments to savers – deposits, insurance policies, mutual funds, and, especially, combinations thereof – intermediaries determine the fraction of resources that individuals save. Intermediaries affect both the quantity and the quality of society’s output devoted to productive activities. Intermediaries also tailor financial instruments to the needs of firms. Thus firms can issue, and savers can hold, financial instruments more attractive to their needs than if intermediaries did not exist. Innovations can also spur the development of financial services. Improvements in computers and communications have triggered financial innovations over the past 20 years. Perhaps, more important for developing countries, growth can increase the demand for financial services, sparking their adoption. 26Critical Assessment In translating these concepts to the world of financial intermediation, one ends up at the so-called functional perspective (see Merton, 1995a). The functions performed by the financial intermediaries are providing a transactions and payments system, a mechanism for the pooling of funds to undertake projects, ways and means to manage uncertainty and to control risk and provide price information. The key functions remain the same, the way they are conducted varies over time. This looks quite similar to what Bhattacharya and Thakor (1993) regard as the qualitative asset transformation operations of financial intermediaries, resulting from informational asymmetries. However, in our perspective, it is not a set of operations per se but the function of the intermediaries that gives way to their presence in the real world. Of course, we are well aware of the fact that in the real-world the everyday performance of these different functions can be experienced by clients as – to quote Boot (2000) – †an annoying set of transactions†. The key functions of financial intermediaries are fairly stable over time. But the agents that are able and willing to perform them are not necessarily so. And neither are the focus and the instruments of the financial supervisors. An insurance company in 2000 is quite dissimilar in its products and distribution channels from one in 1990 or 1960. And a bank in Germany is quite different from one in the UK. Very different financial institutions and also very different financial services can be developed to provide the de facto function. Furthermore, we have witnessed waves of financial innovations, consider swaps, options, futures, warrants, asset backed securities, MTNs, NOW accounts, LBOs, MBOs and MBIs, ATMs, EFTPOS, and the distribution revolution leading to e-finance (e. . see Finnerty, 1992; Claessens et al. , 2000; Allen et al. , 2002). From this, financial institutions and markets increasingly are in part complementary and in part substitutes in providing the financial functions (see also Gorton and Pennacchi, 1992; Levine, 1997). Merton (1995a) suggests a path of the development of financial functions. Instead of a secular trend, away from intermediaries towards markets, he acknowledges a much more cycl ical trend, moving back and forth between the two (see also Rajan and Zingales, 2000). Merton argues that although many financial products tend to move secularly from intermediaries to markets, the providers of a given function (i. e. the financial intermediaries themselves) tend to oscillate according to the product-migration and development cycle. Some products also move in the opposite direction, for example the mutual fund industry changed the composition of the portfolios of US households substantially, that is, from direct held stock to indirect investments via mutual funds (Barth et al. , 1997). In our view, this mutual Critical Assessment27 und revolution in the US – and elsewhere – is a typical example of the increasing role for intermediated finance in the modern economy. Thus, in our opinion, one should view the financial intermediaries from an evolutionary perspective. They perform a crucial economic function in all times and in all places. However, the form they have changes with time and place. Maybe once they were giants, dinosaurs so to sa y, in the US. Nowadays, they are no longer that powerful but they did not lose their key function, their economic niche. Instead, they evolved into much smaller and less visible types of business, just like the dinosaurs evolved into the much smaller omnipresent birds. Note that most of the theoretical and empirical literature actually refers to banks (as a particular form of financial intermediary) rather than to all financial institutions conducting financial intermediation services. However, the bank of the 21st century completely differs from the bank that operated in most of the 20th century. Both its on- and off-balance sheet activities show a qualitatively different composition. That is, away from purely interest related lending and borrowing business towards fee and provision based insurance-investment-advice-management business. At the same time, the traditional insurance, investment and pension funds enter the world of lending and financing. As such, financial institutions tend to become both more similar and more complex organisations. Thus, it appears that the traditional banking theories relate to the creation of loans and deposits by banks, whereas this increasingly becomes a smaller part of their business. This is not only because of the changing composition of their income structure (not only interest-related income but also fee-based income). Also it is the case because of the blurring borders between the operations of the different kinds of financial intermediaries. Therefore, we argue first that the loan and the deposit only are a means to an end – which is acknowledged both by the bank and the customer – and that the bank and the non-bank financial intermediary increasingly develop qualitatively different (financial) instruments to manage risks. Questioning whether informational asymmetry is the principal explanatory variable of the financial intermediation process – what we do – does not imply denial of the pivotal role information plays in the financial intermediation process. On the contrary, under the strong influence of modern communication technologies and of the worldwide liberalization of financial services, the character of the financial intermediation process is rapidly changing. This causes a – until now only relative – decrease in traditional 28Critical Assessment forms of financial intermediation, namely in on-balance sheet banking. But the counterpart of this process – the increasing role of the capital markets where savers and investors deal in marketable securities thanks to world wide real time information – would be completely unthinkable without the growing and innovating role of financial intermediaries (like investment banks, securities brokers, institutional investors, finance companies, investment funds, mergers and acquisition consultants, rating agencies, etc. ). They facilitate the entrepreneurial process, provide bridge finance and invent new financial instruments in order to bridge different risk preferences of market parties by means of derivatives. It would be a misconception to interpret the relatively declining role of traditional banks, from the perspective of the financial sector as a whole, as a general process of disintermediation. To the contrary, the increasing number of different types of intermediaries in the financial markets and their increasing importance as financial innovators point to a swelling process of intermediation. Banks reconfirm their positions as engineers and facilitators of capital market transactions. The result is a secular upward trend in the ratio of financial assets to real assets in all economies from the 1960s onwards (see Table 3). It appears that informational asymmetries are not well-integrated into a dynamic approach of the development of financial intermedation and innovation. Well-considered, information, and the ICT revolution, plays a paradoxical role in this process. The ICT revolution certainly has an excluding effect on intermediary functions in that it bridges informational gaps between savers and investors and facilitates them to deal directly in open markets. This function of ICT promotes the exchange of generally tradable, thus uniform products, and leads to the commoditizing of financial assets. But the ICT revolution provokes still another, and essentially just as revolutionary, effect, namely the customizing of financial products and services. Modern network systems and product software foster the development of ever more sophisticated, specific, finance and investment products, often embodying option-like structures on both contracting parties which are developed in specific deals, thus â€Å"tailor made†, and which are not tradable in open markets. Examples are specific financing and investment schemes (tax driven private equity deals), energy finance and transport finance projects, etc. They give competitive advantages to both contracting parties, who often are opposed to public knowledge of the specifics of the deal (especially when tax aspects are involved). So, general trading of these contracts is normally impossible and, above all, not aimed at. (But imitation after a certain time lag can seldom be prevented! Informational data (on stock prices, interest and exchange rates, commodity and energy prices, Critical Assessment29 macroeconomic data, etc. ) are always a key ingredient of these investment products and project finance constructions. In this respect, information is attracting a pivotal role in the intermediation function because it is mostly the intermediation industry, not the ultimate contract parties that develop these new products and services. The function of information in this process, however, differs widel y from that in the present intermediation How to cite The Theory of Financial Intermediation:, Essay examples