Financial Intermediaries as Facilitators of Reputation Acquisition

This paper identi\u85es a new role for \u85nancial intermediaries. The basic premise is that the smooth ow of information is obstructed when the num-ber of lenders becomes too large. This erodes the value of a good credit history, which encourages default and may restrict lending. Financial inter-mediation gets around this di ¢ culty by separating the identity of capital ownership from the identity of lenders. Since each intermediary represents a very large number of capital owners, the number of direct lenders (the intermediaries) can be kept small enough to facilitate the smooth ow of information between lenders even when the number of indirect lenders (de-positors) is very large. This restores borrowers incentives for reputation formation and hence lendersincentives to lend