In the banking literature the existence of financial intermediaries
is generally explained in terms of the transformation of risks,
terms and lot-sizes. Yet these functions could also be performed by
system of perfect and complete markets. Therefore, the approach
taken in "Why Banks"? is to start by investigating the conditions
that, in the real world, render markets imperfect and incomplete,
namely asymmetric information distribution and uncertainty.
Incentive compatible financing instruments (standard debt contracts
as well as equity participation) provide a means of solving these
problems. Financial intermediaries ultimately owe their existence
to their ability to save transaction costs using these instruments
and to solve problems relating to the enforcement of contracts.
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