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Information costs: the aggregation of funds in an FI provides greater incentive to collect information about customers (such as corporations) and to monitor their actions. The relatively large size of of the FI allows this collection of information too be accomplished at a lower average cost (so-called economies of scale) than would be the case for individuals. Liquidity and price risk: FIs provide financial claims to household savers with superior liquidity attributes and with lower price risk. Transaction cost services: similar to economies of scale in information production costs, an FIs size can result in economies of scale in transaction costs.
Brokerage function
Full-service securities firms carry out investment research and make investment recommendations for their retail (or household) clients as well as conducting the purchase or sale of securities for commission or fees Discount brokers carry out the purchase or sale of securities at better prices and with greater efficiency than household savers could achieve by trading on their own. Result: reduced costs of trading (economies of scale: the concept that the cost reduction in trading and other transaction services results from increased efficiency when FIs perform these services)
Information costs
Agency costs: costs relating to the risk that the owners or managers of firms that receive savers funds will take actions with those funds contrary to the best interests of the savers. Possible solution: to place all the funds into a single FI, namely for two reasons:
1. The FI has now a greater incentive to collect information and monitor actions of the firm because it has far more at stake than does any small individual household; in a sense, small savers have appointed the FI as a delegated monitor (that is: an economic agent appointed to act on the behalf of smaller agents in collecting information and/or investing funds on their behalf) The FI may develop new secondary securities that enable it to monitor more effectively, such as bank loans
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