One. I was particularly good at mental arithmetic. As quotation-board boy I posted the numbers on the big board In the customers’ room. One of the customers usually sat by the ticker and called out the prices. They couldn’t come too fast for me. I have always remembered figures. No trouble at all. There were plenty of other employees in that office. Of course I made friends with the other fellows, but the work I , they meant something. They were always changing. It was all I had to be interested in the changes. Why did they change? I didn’t know. I didn’t care.

I didn’t think about that. I simply saw that they changed. That was all I had to think about five hours every day and two on Saturdays: that they were always changing. That is how first came to be interested in the behavior of prices. I had a very good memory for figures. I could remember In detail how the prices had acted on the previous day, Just before they went up or down. My fondness for mental arithmetic came in very handy. Noticed that in advances as well as declines, stock other days. It was not long before I was anticipating movements in prices.

My only guide, as I say, was their past performances. I carried the “dope sheets” in my mind. I looked for stock prices to run on form. I had “clocked fund 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 say, in the LIST.

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 organizations. Thus, it appears that the traditional banking 1 OFF increasingly becomes a smaller part of their business.

This is not only because of the hanging 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 When a banker starts to study the theory of financial intermediation in order to teeter 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 microeconomic 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 tit 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. 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