Theory of Financial Intermediation - A Portfolio Approach

Recent growth of financial institutions has resulted in an increased need for the financial analysts to study their behavior closely. In this study an attempt is made to explain the behavior of financial intermediaries in terms of portfolio theory using a preference function approach. By and large, the literature on the theory of financial intermediation has concentrated on either the asset side or the liability side of the balance sheet. In this paper, we have explicitly considered the fact that two sides of an intermediary’s balance sheet are not independent.