Information and Finance

Recent Development of the Theory of Financial Intermediation

Abstract

For more than a decade, there have been various financial structural changes and a great deal of effort has been devoted to reforming the financial systems to cope with those changes both in Japan and the United States. While there may be many reasons for such structural changes, the most important factors for the changes have been financial deregulation and the rapid progress in telecommunication technology which reduced the value of financial intermediation. To understand the background of these movements, Section I briefly reviews the changes of ideas concerning the role of banking from the end of 19c. to 1960's. Then, Section II describes the recent development of microeconomic studies of financial intermediaries, emphasizing its relation to information economics. The importance of information gathering and diversification of investment in an incomplete information economy are emphasized.
After briefly examining the studies on the economic function of demand deposits and the peculiarity of bank assets, Section III will elaborate on the necessity of revising the financial system in areas such as the removal of restrictions in order to promote competition in the financial field while paying close attention to the instability of the credit system.