By acting as a delegated monitor, financial in termediaries reduce the degree of information imperfection and asymmetry between the ultimate suppliers and users of funds.

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In assessing this statement, consider what a financial intermediary does in the context of information problems between savers and borrowers.
Option 1: True. The idea of intermediaries acting as delegated monitors is central to the role of financial intermediaries. By conducting screening, monitoring, and enforcing covenants on behalf of many small savers, they reduce information asymmetry and moral hazard. This monitoring can lower information imperfections by providing the market with better signals about borrower quality and by alleviating adverse selection and monitoring costs for individual lenders.
Option 2: False. If you claim that intermediaries do not reduce information imperfection or asymmetry, you would be ignoring the empirical and theoretical basis that demonstrates how pooling funds, performing due diligence, and ongoing oversight mitigate asymmetric information between fund suppliers and users. This would contradict the standard view of financial intermediation as a mechanism to improve informational efficiency in credit markets.
Option 1 elaboration: The delegated-monitoring function means lenders rely on the intermediary’s expertise, networks, and contractual protections, which can translate into lower-risk evaluations and better covenants, thereby easing the information gap that exists when individuals directly fund borrowers. This aligns with traditional theories of banking and money markets where intermediaries are efficient at screening and monitoring.
Option 2 elaboration: The false position tends to overlook the reality that information problems persist even with intermediaries, but are mitigated rather than eliminated. It would also ignore the evidence that external finance depends heavily on credible monitoring and enforcement that intermediaries provide, especially for borrowers with limited access to capital markets or weak signaling capacity.

FINS5530-Financial Institution Mgmt - T3 2025

By acting as a delegated monitor, financial in termediaries reduce the degree of information imperfection and asymmetry between the ultimate suppliers and users of funds.

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