The Main Reasons That Have Resulted in The Bank Disintermediation

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In 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 be issued by the final user of the funds, in the process passing the banks as an intermediary. Normally, banks usually act as a financial intermediary for debt management, borrowing from depositors and lending to borrowers. This is done using instruments such as bonds, safety deposit accounts which earns interest, savers, and other credit facilities.

THE REASONS THAT CAUSED BANK DISINTERMEDIATION.

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. Public Deficits is 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. The deficits are financed mainly by the issue of marketable securities, which is done by both the central and local governments. Securitization initiated an abundant increase in the issuance of securities both traditional and n...

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