Financial Disintermediation - 1396 Words

Disintermediation refers to: (1) the investing of funds that would normally have been placed in a bank or other financial institution (financial intermediaries) directly into investment instruments issued by the ultimate users of the funds. Investors and borrowers transact business directly and thereby bypass banks or other financial intermediaries. (2) The elimination of intermediaries between the first case providers of capital and the ultimate users of capital, withdrawal of funds from financial intermediaries such as banks, thrifts, and life insurance companies in order to invest directly with ultimate users. In America, most mutual savings banks are located in the Northeast, and are owned by their depositors and borrowers. A mutual†¦show more content†¦Borrowers can hope to borrow at lower cost as a result of disintermediation. Investors lose the safety of bank deposits but then they also should get better rates of return. Investors take on some extra risk which can be controlled through the usual mechanisms of diversification and the selection of appropriate investments. At the same time disintermediation eliminates the banks interest margin and this benefit is shared by investors, borrowers and investment market intermediaries and advisors. Decline of Traditional Banking: Financial Innovation and Financial Disintermediation. 1. Money market mutual funds - competition for bank deposits from investment banks. Market really exploded in the late 70s. Req Q fixed int rates on savings accounts at 5.5% when market rates were over 10%. Massive financial disintermediation. 2. Junk Bonds - Bond market competes with commercial banks for corporate borrowing. Before 1980, only investment grade bonds were issued. Investment grade requirements are very strict. Only blue-chip, well-established companies had access to the bond market. Small, medium, lesser known, younger firms could not issue bonds, they had to go to a bank for a commercial loan. Investment grade bonds that were downgraded below investment grade, were classified as junk bonds, companies were fallen angels. Possible reason for no, non-investment grade bond market: Information was too costly. OnceShow MoreRelatedDiscussion of the Main Reasons that have Resulted in the Bank Disintermediation 1340 Words   |  6 PagesDisintermediation could lead to economic crisis because of the importance of banks in the economy. Banks are very important in an economy because they provide safety for depositor, provide a wide variety of loans and offer other credit vehicles like cards and overdrafts. The bank connects surplus and deficit economic agents and significantly contributes to the progress of any economy through facilitation of business. †¢ Economic Development: Banks facilitate the development of saving plans andRead MoreThe Main Reasons That Have Resulted in The Bank Disintermediation1472 Words   |  6 PagesIn 1967, the term disintermediation was first brought into the banking industry and later became a popular term used in commerce generally in the 90s. Economics or financial policies are some of the factors leading to the phenomenon known as disintermediation which banks sometimes face. Bank disintermediation is a situation whereby funds which should ordinarily be invested in banks are directed into some other investment instruments such as assets backed securities and convertibles, which will beRead MoreThe Main Forces that are Causing Unprecedented Change in the Corporate and Wholesale Financial Markets2424 Words   |  10 Pages02BSC024 Identify and discuss the main forces which are causing unprecedented change in the corporate and wholesale financial markets. Explain why these forces have had such an impact on these markets. Clare F Thomas 9934287 May 2003 Clare F Thomas Corporate and Wholesale Banking B INTRODUCTION The traditional function of commercial banks has been to act as financial intermediaries between deficit and surplus sectors. 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