Which of the following is NOT a reason for the specialness of financial intermediaries?

Question

BlackTom AI · Accepted Answer

To tackle the question, I will examine each proposed option in turn and explain whether it lines up with typical explanations for why financial intermediaries are considered 'special'.

Option a: 'Lower average information costs.' This is generally cited as a reason intermediaries reduce information asymmetry and screening costs, through expertise, economies of scale, and their established processes. Therefore, this is a plausible reason for the specialness of intermediaries.

Option b: 'Lower price risk and superior liquidity attributes of financial claims to household savers.' Intermediaries often transform illiquid or riskier assets into more liquid, standardized claims, and they help manage price risk via diversification and asset-liability management. This aligns with standard explanations, so this is a plausible reason as well.

Option c: 'No agency costs.' The idea of 'no agency costs' would imply that intermediaries perfectly align incentives between principals (savers) and agents (managers), eliminating conflicts of interest. In practice, agency costs exist in financial intermediaries (e.g., conflicts of interest, moral hazard, risk-shifting, principal-agent problems). Thus, saying there are no agency costs is not a valid reason to attribute specialness; it contradicts common theory.

Option d: 'Lower average transaction costs.' Financial intermediaries typically achieve lower transaction costs through economies of scale, liquidity provisioning, and cross-subsidization across customers. This is a standard reason for their special role, so it is plausible.

Option e: 'All of the options are reasons for the specialness of financial intermediaries.' Since option c is not a correct characterization (no agency costs is not a true description in practice), this all-encompassing claim would be incorrect. Therefore, option e conflicts with the reality that agency costs do exist in financial markets.

In summary, the statements in options a, b, and d are consistent with common explanations for the unique role of financial intermediaries, while option c contradicts well-established understanding about agency costs, and option e becomes false because not all listed statements are true reasons. The overall reasoning hinges on recognizing that agency costs do exist and thus 'No agency costs' is not a valid reason to call intermediaries special, and that undermines option e as a blanket claim.

Which of the following is NOT a reason for the specialness of financial intermediaries?

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Which of the following is NOT a reason for the specialness of financial intermediaries?

View Explanation

Log in for full answers

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