The Theory of Financial Intermediation – Coursework Example

The paper "The Theory of Financial Intermediation" is an excellent example of a coursework on finance and accounting. Wal-Mart is one of the largest retailers in the world having the presence in many countries. Wal-Mart has been doing its investment activities mostly with Goldman Sachs & Co. (Lewis, 2001). Traditional Theories of Resource Allocation suggest that the firms and households interact with each other in the markets with financial intermediation has no role in it. (Allen&Santomer, 1996). In the presence of perfect markets, there is no room for the financial intermediation hence firms are considered as Pareto Efficient. Alternative views also suggest that financial intermediaries help the flow of household savings to the firms so that they can be channelized into the mainstream economy to create wealth. Also due to imperfection in the markets, financial intermediaries play a crucial role for the firms. Traditionally, Financial Intermediaries help firms to reduce transaction costs that can be defined as the time and money spent in performing financial transactions. (Morawski, 2007). Because of the specialized nature of these financial intermediaries, their expertise and size help them to take advantage of the economies of scale. This benefit is then trickled down to the firms which take advantage of this and they can enjoy the low transactions cost. Apart from that financial intermediations greatly help firms to share the risks. Financial intermediation greatly reduces that risk by diversifying financial exposure among various investors. Modern theory bases its assumptions regarding the role of financial intermediation because of the fact that there exists an asymmetry of information between the parties to the transactions. It means due to lack of information on the part of the parties, financial intermediaries not only assess the available information in the best possible way but also screen out bad risks to save the firms from launching itself into unseen territories. It must be noted that over the period of time, the role and responsibilities of the financial intermediaries has changed. What started as a mechanism for facilitating the flow of funds between households and firms, Financial Intermediaries have now evolved into risk-sharing institutions. This kind of issues which financial intermediaries help achieve the firms can be held in various different forms like issuance of stocks i.e. Initial Public Offerings, Seasoned Issues, issuance of long-term as well short-term debt instruments etc. By helping organizations to offer these various financing options, Financial Intermediaries help firms to achieve the above-mentioned roles played by financial intermediaries. Apart from that financial intermediaries also help firms to obtain loan financing from the banks especially syndicated financings as well as securitization. In the conclusion, financial intermediaries play a very critical role in linking the households with the firms by channeling the savings of households to the firms for the purpose of wealth or value creation besides sharing risks and lower costs for the transactions.