Ó¢ÓïÂÛÎÄÍø

The theory of ®nancial intermediation
Franklin Allen, Anthony M. Santomero *
The Wharton School, University of Pennsylvania, Philadelphia, PA 19096, USA
Abstract
Traditional theories of intermediation are based on transaction costs and asymmetricinformation. They are designed to account for institutions which take deposits or issueInsurance policies and channel funds to ®rms. However, in recent decades there havebeen signi®cant changes. Although transaction costs and asymmetric information havedeclined, intermediation has increased. New markets for ®nancial futures and optionsare mainly markets for intermediaries rather than individuals or ®rms. These changesare dicult to reconcile with the traditional theories. We discuss the role of intermediationin this new context stressing risk trading and participation costs. Ó 1998 Elsevier
Science B.V. All rights reserved.
JEL classi®cation: G2; G1; E5; L2
Keywords: Intermediation;Risk management; Delegated monitoring; Banks; Participation
costs
1. Introduction
In this paper we review the state of intermediation theory and attempt to
reconcile it with the observed behavior of institutions in modern capital markets.
We argue that many current theories of intermediation are too heavily
focused on functions of institutions that are no longer crucial in many devel-
Journal of Banking & Finance 21 (1998) 1461¡À1485
* Corresponding author. Tel.: +1 215 898-7625; fax: +1 215 573-8757; e-mail: santo@®-
nance.wharton.upenn.edu.
0378-4266/97/$17.00 Ó 1997 Elsevier Science B.V. All rights reserved.
PII S 0 3 7 8 - 4 2 6 6 ( 9 7 ) 0 0 0 3 2 - 0
oped ®nancial systems. They focus on products and services that are of decreasing
importance to the intermediaries, while they are unable to account
for those activities which have become the central focus of many institutions.
In short, we suggest that the literature's emphasis on the role of intermediaries
as reducing the frictions of transaction costs and asymmetric information
is too strong. The evidence we o€er suggests that while these factors may
once have been central to the role of intermediaries, they are increasingly less
relevant.
We o€er in its place a view of intermediaries that centers on two di€erent
roles that these ®rms currently play. They are facilitators of risk transfer and
deal with the increasingly complex maze of ®nancial instruments and markets.
Risk management has become a key area of intermediary activity, though intermediation
theory has o€ered little to explain why institutions should perform
this function. In addition, we argue that the facilitation of participation
in the sector is an important service provided by these ®rms. We suggest that
reducing participation costs, which are the costs of learning about e€ectively
using markets as well as participating in them on a day to day basis, play an
important role in understanding the changes that have taken place.
The paper proceeds as follows. In Section 2, we o€er a review and critique of
the usual views of intermediation found in the literature. This critique is supported
by data presented in Section 3, which outlines the changes in ®nancial
systems that have occurred over the recent past. In Section 4 the current justi-
®cations for one of the growth areas of intermediary services, namely risk managemen±¾ÂÛÎÄÓÉÓ¢ÓïÂÛÎÄÍøÌṩÕûÀí£¬ÌṩÂÛÎÄ´úд£¬Ó¢ÓïÂÛÎÄ´úд£¬´úдÂÛÎÄ£¬´úдӢÓïÂÛÎÄ£¬´úдÁôѧÉúÂÛÎÄ£¬´úдӢÎÄÂÛÎÄ£¬ÁôѧÉúÂÛÎÄ´úдÏà¹ØºËÐĹؼü´ÊËÑË÷¡£