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Critically Discuss The Main Reasons That Have Resulted In The Bank Disintermediation And Make A Critical Assessment Of The Implications And Impact

1426 words - 6 pages

Finance is a very important area in economics which deals with managing and distribution of resources within certain economic conditions over a certain period of time. The study of
Finance is very important because individuals, governments, economies and business entities require it to function in their spheres of influence. These entities determine the appropriate risk level and time value of money required to maximise the use of the available resources; and for that purpose financial institutions like banks are created to deal with such issues.
Some factors in the economy or financial policies could lead a phenomenon which banks sometimes face known as disintermediation. ...view middle of the document...

Bank disintermediation could be caused by a couple of reasons with one of which could be securitization. Securitization is the process whereby illiquid assets are turned to liquid assets and convertibles. This conversion allows the assets to sell in the capital markets. It can be applied to short term financing, where bank loans have been transformed into tradable assets and commercial paper are used as substitutes. Furthermore, Public Deficits can also be a major source of bank disintermediation in most parts of the world; this is because of the increase in healthcare service, education, real estate, recruitment and social security payments.
Low interest rates in banks facilities like saving accounts, savers and ‘ NOW’ accounts could lead to financial disintermediation, this is because of policies like regulation ‘Q’ and Regulation ‘D’ were promulgated by the Federal Reserve Board in the United States. This also led to impose interest rate ceilings on various other types of bank deposits, including savings and time deposits. The imposed limit on savings deposit interest rates also encouraged the rise of alternatives to banks, including money market funds. As a result of these challenges to interest rate ceilings, the congress allowed the creation of new types of flexible interest bank accounts, including money market accounts. Investors who are profit oriented take on more risk because they lose the protective cover that banks deposits give, but this loss can be managed through strategies like diversification and the selection of the appropriate investment which would lead to higher returns, in the process investors would seek counsel from financial institutions like banks for investment advice. Sometimes Inflation rates in a country could lead to bank disintermediation because as inflation rate increases in a country market interest rate increases as well, this means that the interest rate of treasury bills, corporate bonds and other debt instruments would increase as well. This occurred in the 1970s in the United States.
Bank Disintermediation could also be caused by innovation and technology. In the past retail banking is different to other industries in that the banks have traditionally played the role of both producer and retailer in the producer-retailer-consumer chain. They both produce and distribute financial services products. But as new entrants come into the chain, instead of removing a part of the chain, they substitute themselves for the existing one or add an additional one into the chain. As the advent of the internet technology grew, the new entrants found new and innovative ways to create value for consumers, with some notable exceptions, such as Barclays with its mobile payment service Pin digit. The banks have failed to respond to technology shifts and changing customer behaviour patterns and are allowing these more agile players to insert themselves into the value...


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