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Certain factors can slow down financial integration in developing countries. These include problems of information asymmetry, lack of intermediary capital, and crowding-out. Individuals already involved in existing financial networks may have few incentives to deal with an intermediary. Village norms against cooperation and outsiders may also be strong.

This paper considers optimal taxation of savings intermediation services in a dynamic general equilibrium setting, when the government can use consumption, income, profit and financial intermediation taxes. Financial services should be brought within VAT. This result holds, irrespective of whether the government can utilize a 100 percent profit tax or not. If a 100 percent profit tax is available, the optimal tax on financial intermediation is zero only in the steady state, while it can be positive away from that. If the 100 percent profit tax is not available, then the government optimally levies a positive tax on capital as an indirect way to tax rents. The optimal tax on financial intermediation is exactly equal to this tax on capital income. Hence the optimal tax might differ from the tax rate on other consumption.

This chapter deals with the mobility of capital. Romans made many investments in agriculture, cities, and roads, all of which are capital. They accumulated the needed capital with the help of Roman banks, which were remarkably similar to the first modern commercial banks in eighteenth-century London. In order to evaluate the sophistication of the Roman financial market, the chapter inquires about the presence of credit intermediaries—institutions that mediated between borrowers and lenders, obviating direct contact between them. It then presents a theory of financial intermediation to describe the hierarchy of financial sources and its relation to the functioning of the economy as a whole. This facilitates an abstract evaluation of the Roman evidence, but not a historical one.

This chapter discusses the challenges that the financial regulators of industrial nations now face as a result of financial innovation and changes in the strategy of financial intermediaries. Generally speaking, the need for commercial banks to enter new businesses, given the decreasing importance of traditional financial intermediation, has led to a review of the means for regulating bank activity. This review has affected — and continues to affect — the separation of the classic financial intermediation activity from other activities, primarily securities trading and interests acquired by banks in other companies.

It is observed that openness of different media in the capital market allows them to compile information and disseminate it across the community. However, some studies show that its revealing nature can also cripple the capital market and one of its best examples is takeover. On the other hand, private financed companies are not obligatory to publish such information, and that is the reason why companies in knowledge-based industries try to remain private as long as they can, regardless of their need for capital risk. This chapter investigates the ways that financial intermediaries such as banks can use their attributes to assist in the delegation problem. Particularly, it shows how intermediation and assistance of financial intermediaries of debt contracts can prevail over some of the informational and delegational weaknesses of the capital market.

This chapter provides a brief historical background of the Spanish financial system, which has experienced significant changes over the course of the last 13 years at varying rates, though a sense of purpose has persisted and ultimately served to create a modern and open financial system. It notes that, from a market point of view, important changes have occurred in banking activities due to the attitudes of families and firms regarding financial intermediation and the deregulation process. The chapter explains that the concept of liberalization has been the driving force behind the process of reform, and that deregulatory activity in the banking industry has been constant. It adds that financial innovation has also caused changes in the system, creating new products and markets, increasing competition between institutions, and presenting new challenges to the financial authorities. The chapter discusses the structure and trends in the industry and analyses the Spanish banks' profitability.

Where in the national economic activity statistics could one see a major financial crisis approaching, or track its progress? The financial intermediation sector seems the natural place to look first, because it was the epicenter of the recent crisis that originated in the mortgage market and spread throughout the financial sector and then the real economy. But where is this sector located in the current national accounting system and how well it is connected to the rest of the economy? We approach this second question by placing financial intermediation at the center of a modified circular flow model in which nonfinancial businesses and households are linked by financial intermediaries, rather than treating these intermediaries as just another resource-using industry. Treating intermediation in this way helps explain how shocks that affect even small parts of the economy can propagate rapidly and widely. Our accounting framework also allows us to treat asset bubbles and their consequences as disequilibrium phenomena, rather than imposing a priori the assumption of asset market equilibrium on the collection and organization of macro data. We use this framework to measure Tobin’s average q ratio over the period 1960 to 2012, as well as the degree of financial leverage.

Studies of modern banking systems focus on two issues: the efficiency of banks as intermediaries and the connection between financial intermediation and economic growth. Earlier banking systems should be judged on the same criteria. Each region of the U.S. developed a unique regional banking structure, which had implications for intermediation and growth. It was a period of experimentation, often labeled as free banking, that allowed states to create banking structures tailored to local needs.

This chapter discusses basic trends in the banking sector that are being driven by technological and regulatory changes. It first considers the expansion of banking and financial intermediation, the relationship between the growth of the financial sector and economic growth, and the link between financial innovation and systemic risk. In particular, it examines the role of market-based banking, securitization, and shadow banks in the 2007–2009 crisis. It then describes the evolution of business models in banking, the entry of new competitors to banks, and the evolution of competition. It also looks at the evolution of market concentration out of the consolidation move that has followed the transformation of banking. It shows that increasing competition and the transformation in the banking sector has developed in parallel with a process of concentration.

this chapter focuses on financial crises paying attention to the linkages between the macroeconomy, institutions and financial intermediation, pointing out the “perverse” interactions between financial disequilibria, macroeconomic imbalances, and the (in)stability of economic institutions which are typical of crisis periods. The argument stresses that these interactions may delay the return to normality and even induce, under certain conditions, irreversible changes.

Modern theories of financial intermediation begin from the premise that small, young firms, due to information asymmetries, will not have access to arm's length markets in bonds and commercial paper. Small and young firms must rely on financial intermediaries, principally banks, with whom these firms form long‐run relationships. Modern theory stands in contrast to the dominant contemporary theory of banking practice; namely, the real‐bills doctrine. Banks that followed the doctrine loaned only to established businesses with impeccable reputations. Had early American bankers adhered to the doctrine, they would not have been the engines of growth that they actually became. Banks mattered because they encouraged entrepreneurship by being entrepreneurial themselves.

Consumer credit supply arises through a production process called financial intermediation. Intermediation involves transfer of funds from consumer savers to consumer borrowers through institutions that serve as financial intermediaries. Intermediaries make the transfer more efficient than a direct transfer by managing information processing, risk intermediation, monitoring, temporal intermediation, and size intermediation. Although these aspects of production reduce overall costs, they cannot reduce costs to zero, and remaining costs vary among classes of institutions. The chapter reviews the production process and these costs and then discusses how risk costs lead to the possibility of credit rationing. Finally, the chapter begins discussion of how consumer credit granting institutions have attempted to reduce costs through technological means such as statistical credit scoring and obtaining funds to lend through new kinds of financial market instruments collectively known as asset-backed securities (ABSs).

Economic historians often take for granted the idea that financial centres have followed one standard bottom-up development process, gradually evolving from commercial hubs to banking places. This chapter suggests that such an interpretation is rather simplistic. The analysis is focused on a remarkable counterexample: the sudden emergence of Brussels as an international financial centre in the mid-19^th century. The case-study is articulated into five parts, each one looking at a different aspect of the growth of the new centre (capital resources, business elites, regulation, the domestic money market, and the foreign exchange market). The conclusion is that the top-down process observed in the Brussels experience sheds light on the fact that semi-institutional actors (such as central banks, or commercial banks connected to the political power) can successfully enact specific policies aimed at enhancing local financial development.

A major development over the past fifty years has been the growth of ‘market-based credit intermediation’, ie the use of securities markets to provide debt financing for firms and households, which would otherwise have been supplied by banks. Prior to the financial crisis, regulators generally believed that these developments had reduced the overall level of systemic risk, but instead, they brought important changes to the cross-sectional configuration of systemic risk. The existing regulatory framework blinded regulators in the monitoring and control of the emerging systemic threats. There was no serious attempt to evaluate the changes from a macroprudential perspective. Post-crisis efforts to address market-based credit intermediation try to identify and regulate systemically important institutions and are beginning to focus on systemically concerning practices and financing strategies. Understanding how innovation in the financial system may produce new sources of systemic risk goes to the heart of current regulatory endeavours, and of this book’s project.

This chapter focuses on the tension between the preservation of lender incentives and shedding credit risk. It addresses this issue in three steps. First, it discusses foundational theories of financial intermediation in which a bank's main purpose is to exert screening or the monitoring of loans to reduce borrower moral hazard and adverse selection. One of the primary features of these theories is that banks must retain at least part of the credit risk of the loans in order to preserve their incentives to monitor and screen borrowers. Second, it examines how contractual arrangements attempt to preserve bank incentives while transferring credit risk in a variety of markets, including credit default swaps, loan syndication, and securitization. It then examines the recent subprime mortgage crisis with a particular emphasis on how the conflict between lender incentives and shedding credit risk affected default patterns since 2005. Finally, the chapter explores potential reasons securitization failed to preserve lenders' incentives to screen and monitor borrowers.

This chapter argues that increased mobilization of domestic financial resources is critical if Zambia is to achieve its development objective of becoming a prosperous middle income country by 2013. This is a significant challenge requiring that impediments to the development of the financial sector, particularly the existence of severe information costs in the financial sector, are addressed. In this regard, Chapter 7 demonstrates how the nature of Zambia’s financial sector can be explained through the existence of information costs. These information costs can be addressed by enhancing the legal and institutional framework; encouraging more effective competition that promotes financial intermediation and consumer welfare, and improving financial inclusion. Policies that support the secondary market for both public and private debt are also critical for improved domestic and external resource mobilization.