Financial Disintermediation in Global Banks

Financial disintermediation is the investment of funds (that would under normal circumstances have been deposited in a bank or financial institution) into financial instruments provided by those using the funds. The investors, as well as borrowers, conduct business transactions without the support of banks/financial institutions.

According to experts, global banks funding structures are moving simultaneously, with a steep and continuous decrease in funding on the whole. Disintermediation has become significant in the financial markets due to an increase in utilization of securities to secure capital from the capital markets instead of the banks.

Under normal circumstances, banks perform the role of a financial intermediary for debt, borrowing/lending. The process of selling securities (bonds) by avoiding borrowing enables a borrower to receive funds from the investors directly. The widespread use of financial instruments like asset- backed securities and convertibles have facilitated this.

The increase in disintermediation decreases the business opportunities for commercial banks while enhancing the scope of capital markets. It increases the business opportunities for investment banks directly and for other investment stakeholders (brokers, fund managers) indirectly.

Borrowers would be able to secure funds at a lower rate due to disintermediation. Investors have to forgo the security of bank deposits, but they are assured of improved rates of return.

Investors have to manage risk through various mechanisms of diversification along with the identification of relevant investments. However, disintermediation removes the bank’s interest margin and the gain is shared by investors, borrowers and other investment stakeholders.

Global banking is illustrated by cross-border fragmentation. Cross-border bank claims are shrinking in the recent past. Again, the decrease of cross-border interbank claims is significant, while cross-border claims in comparison to non-banks have also been restrained. However, the increase in non-financial corporation’s global debt issuance has been sustained.

The global banks funding structures are migrating simultaneously to cross-border bank deleveraging. Wholesale funding is shrinking due to a transition to secure funding opportunities. The transformations in a bank’s funding pattern are significant in the financial centres.

Banks global net issuances are decreasing clearly overall while cross-border interbank liabilities are also reducing. Banking activities through the international financial centres remain low. Regulatory reforms have become the key factor.

The trend of moving towards secure funding models is expected to be permanent in the long run according to experts. International banks, which have established branches across global destinations through regionally funded and capitalized subsidiaries have become more robust.

On the other hand, international capital markets are expanding expeditiously. International issuances – bonds provided by non-residents across markets have increased, especially in emerging economies.

Disintermediation is also taking place at the corporate level across the globe. The corporate has migrated from bank loans to funds from the bond markets.

An area of concern is that markets tend to overprice before settling down at the right price. There has been historical evidence of the financial crisis due to the banks being replaced by the capital markets in securing funds. Though there are risks associated with disintermediation, the role of banks as the financial hub would continue to diminish.

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