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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IN THE CRISIS AND DEPRESSION, 1920-I921” is talking about how the bank is able to liquidate and unexpectedly drain the cash resources. The bank has a variety of deposits that are either cash, checks or other banks and the deposit of a proceeding of a loan. With the loan there is an interest rate that is added to the loan. After not paying the loan the bank is allowed to liquidate the account if need be.
Increasing global connectivity and integration in today’s world ensures that almost any serious problem has worldwide ramifications. The global financial system can serve as a key example of this phenomenon. Very recently, Britain’s fifth-largest mortgage lender Northern Rock was rescued by emergency funding from the Bank of England. This made the Newcastle-based firm the highest profile UK victim of the global credit crunch that had been triggered by the sub-prime mortgage crisis in the US. The bank run on Northern Rock that followed was unprecedented in recent UK monetary history. The Overend Guerney crash of 1866 was the last recorded bank run in the UK, before Northern Rock lost over £2 billion, starting on the 14th of September 2007.
The book The Banker’s New Clothes: What’s Wrong with Banking and What to Do About It was wriiten out of necessity after the worst economic downturn in the United States in more than eighty years. The massive breakdown of the United States housing market in 2006 and 2007 had overwhelming consequences on domestic and global economies and devastated the global banking systems. Between 2001 and 2006, many large financial institutions had accumulated large positions in the subprime mortgage market that gave out superb returns. Asset prices in this market inflated to unreasonable levels due to the quality of the loans being packaged and sold by commercial bankers and would soon create a major asset bubble in the markets. The bursting of the housing
Cullen, Lisa. "What It Means For Your Wallet". Time. April 10, 2006. Off of NewsBank
Mora, Victor. "Will Bank of America Surpass The Competition?" Wall St. Cheat Sheet. Wall St. Cheat Sheet, 29 June 2013. Web. 12 Apr. 2014.
If financial markets are instable, it will lead to sharp contraction of economic activity. For example, in this most recent financial crisis, a deterioration in financial institutions’ balance sheets, along with asset price decline and interest rate hikes increased market uncertainty thus, worsening what is called ‘adverse selection and moral hazard’. This is a serious dilemma created before business transactions occur which information is misleading and promotes doing business with the ‘most undesirable’ clients by a financial institution. In turn, these ‘most undesirable’ clients later engage in undesirable behavior. All of this leads to a decline in economic activity, more adverse selection and moral hazards, a banking crisis and further declining in economic activity. Ultimately, the banking crisis came and unanticipated price level increases and even further declines in economic activity.
McKean, Melissa. The Advantages of Using Online Bill Payment. eHow Money. July 2010. Web. 11 March 2011.
In the period of 1930’s it is recorded that nearly nine thousand banks closed shop, mainly because of huge amounts of bad debts written off caused by collapse of the stock market, lack of uptake and creation of new loans. At the time depositors lost all their savings because there saving were not insured which made the situation even worse for them. Critics argue that the banking system is to blame for the current economic status in the US, citing that they lent out funds for short term but the funds were invested in longer term and riskier investments, secondly most banks had overburden their clients with huge debts while they themselves were not liquid or solvent enough leading to banks insolvency and fall in credit availability which are to blame for the current
Sorry this article is so long but I thought it was a great article and wanted to share it. It makes some great points about loaning money to the government and the fact that when you loan the money them they rarely re-pay the principle, so they have to continue to pay the interest payments. It also goes into some detail about the relationship between the government and banks. The government doesn’t want to see banks fail because they want their sources of money to be strong. I also like the way this article describes how banks fail. It gives some good examples about those banks that fail due to bad debts and non repayment on loans.
The bank failure in Jamaica illustrates how negative mindsets and behaviors can devastate the financial system and disrupt economic growth. The primary role of any bank is to safeguard its customer’s money, offer interest rate on deposits, lend money to creditworthy individuals, and make sound investment decisions to maximize shareholder value. Because of rapid economic growth between the late 1980s and early 1990s in Jamaica, the Central National Bank (CNB) and Worker’s Savings and Loans Bank (WSLB) loosened their monetary policies, provided preferential interest rates and extended credit beyond what was reasonable to members of its own board of directors, managing directors, and officers of the bank. These actions posed significant risks to the bank and its future.
In order to understand the concept of financialization and the housing market on the global and local level, one must know that there is a global pool of money that is simply the worlds savings bank. In 2000 the pool had $36 trillion and has since doubled in size (Blumberg 2008). Its most recent profit increase was a result of developing countries and cities such as India, Abu Dhabi, and China making money. This doubled the cash pool available for investments, but left fewer solid investments for the taking. The solution was residential mortgages and the US housing market. The investment managers thought the low-risk high-return investment in the housing market was a good, stable idea. The glo...
The banking sub-sector in the opinion of the experts can assist in the break away from a depressed economic performance to an accelerated growth if and only if, the sector is not repressed and distorted with inappropriate and inflexible regulations (Oluyemi, 1995)
Wells Fargo Bank. (2014). Wells Fargo team member handbook – January 2014. Retrieved from http://teamworks.wellsfargo.com/handbook/HB_Online.pdf
This system helps all of these banks provide financial secrecy which is that only you and your banker would legally be allowed to know the financial activity within your account. The financial secrecy, completely different from financial privacy, includes many regulations to maintain this asset of secrecy. For example, many banks would n...
Velde,D.K (2008). The global financial crisis and developing countries. Available at: http://www.odi.org.uk/resources/download/2462.pdf (Accessed: 5th August 2010).