Post date: Nov 25, 2013 6:06:22 AM
Conventional theories of intermediation are founded on the concepts of transaction costs and asymmetric information. They are constructed to account for financial institutions, which take deposits or issue insurance policies and channel the funds to the needy enterprises apart from serving to reduce transaction costs and informational asymmetries. On the other hand, in recent past there have been noteworthy vicissitudes, which deserve the attention of a researcher. Even though transaction costs and asymmetric information have declined, intermediation has increased. As deregulation and deepening of financial markets, etc., tend to reduce transaction costs and informational asymmetries, the propositions of financial intermediation theory need a review and sound questioning. This diverges from the emerging point of view that financial intermediation is a value-creating economic process. The given paradox necessitates more explanations from the traditional theory of intermediation. Conventional theory is wanting in explaining the persisting and expanding economic importance of financial intermediaries.