Financial intermediation and recent developments in the UK financial system
in The UK financial system (fifth edition)
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This chapter describes the process of financial intermediation, and in doing so, it examines the arguments as to why we need financial institutions. It discusses the reasons why we need financial intermediaries and hence the benefits of the financial sector. The chapter highlights the nature of financial intermediation, examining the various roles of financial intermediaries: banks as transformers, undertaking of transformation process, and providers of liquidity insurance. Banks reduce the problems arising out of asymmetric information. The chapter also examines the implications of the existence of financial intermediaries for individual lenders and borrowers using the Hirshleifer model and provides an overview of the tremendous changes that have taken place in the UK financial system over the last 20 years.

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