Money, Financial Intermediation and Governance

Money, Financial Intermediation and Governance

Dino Falaschetti and Michael J. Orlando

Dino Falaschetti and Michael Orlando unify the treatment of the many deeply related topics in money and banking in this wide-ranging book. By continually building on the assumption that economic actors are maximizers, they explain how monetary and financial services, as well as related governance mechanisms, influence economic performance. In this manner, Money, Financial Intermediation and Governance not only lets readers make sense of today’s monetary authorities and financial markets, it lets them see through superficial complexities to the fundamental influences that will shape those organizations for years to come.

Chapter 14: Financial Intermediaries and their Governance

Dino Falaschetti and Michael J. Orlando

Subjects: business and management, corporate governance, economics and finance, corporate governance, financial economics and regulation, money and banking


INTRODUCTION Recall from Part II that the cost of bartering discourages goods and services from moving to their highest valued uses. And while ‘money’ can economize on these costs, a sound monetary system must continually resist political forces that threaten efficiency (for example, those associated with time inconsistency problems). By carefully identifying these influences, we set the stage for investigating how societies organize their monetary authorities and how these organizational mechanisms relate to levels of wealth and fluctuations therein. Chapter 13 similarly sets the stage for our investigation of how societies organize their financial markets, and why success on this margin strongly influences economic performance. Just as Part II highlights the costs of barter to motivate the importance of money, Chapter 13 highlights the costs of ‘lemons’ adversely selecting themselves into financial transactions, or individuals acting in a morally hazardous manner, to motivate the importance of financial intermediation and corporate governance. In that chapter, we saw that reducing information asymmetries can expand economic opportunities for both suppliers and demanders of financial capital. Strong incentives can thus exist for market participants (suppliers and demanders of loanable funds) to mitigate asymmetries in a cost-effective manner. In the present chapter, we’ll evaluate how the incentive for proximate suppliers to mitigate asymmetries relates to the organization of financial intermediaries, and what this incentive implies for the efficacy of financial regulation.1 This investigation will show how suppliers can facilitate the productive flow of financial capital by encouraging demanders to reveal...

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