Financial Disintermediation and International Banking

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Impacts of disintermediation on international banking

Disintermediation’s influences on international banking are complex, this analysis will main focus on three aspects:

In the first place, M.Nissenl (2000) found that the functions of intermediary role of banks did not disappear because of disintermediation, on the contrary, disintermediation enhanced the development of intermediaries’ functions, and this was called ‘re-intermediation’. In general, disintermediation lead to the weaken of intermediary functions of banks, and those functions are replaced by other forms of function or institutions――banks’ role of financial intermediaries changed and they turn themselves to be financial agents gradually. This promotes the innovation of banking system.

In the second place, deposit-loan interest rates were decided by central bank in the past, so commercial banks did not need to consider questions about interest rates and there was no price competition between them, the products provided by commercial banks were similar.

However as the development of disintermediation, part of customers of banks were attracted by capital market, deposit-loan interest rates became the determinant of commercial banks’ success or failure. How to attract more depositors and offer loans reasonably became a serious problem faced by banks. Generally speaking, comparing with small and medium size banks, large banks have advantages like large scale and high reputation, so those relatively well capitalized banks have better ability to offer better deposit-loan interest rates and ability to manage asset and liability risk. Small and medium size banks will face more challenges in international market, once they at a disadvantage in competitions, they may be annexed or forced out of business, finally in the international financial market, large banks will occupy the leading position.

Thirdly is that the difficulty of risk management increased. Banks are losing customers because of disintermediation, in order to maintain existing profitability, commercial banks have to decline their risk tolerance, and loan to companies with relatively lower credit rating, this increase banks’ credit exposure. In addition, under the trend of disintermediation the problem of maturity mismatch in the asset-liability management raised――that means short-term deposit of liability side is matched to medium & long-term loans of asset side, liquidity risk and portfolio risk appear at this time, especially for universal banking. And finally, disintermediation exacerbates the fluctuation of financial market, so market exposure of banks is exacerbated.

Conclusion

Disintermediation is a common phenomenon which usually happens during the process of financial restructuring, it reflects the mature of multiple-level capital market and improvements of direct financing. Although it has a great impact on traditional bank business――the influences on traditional loan-deposit business and intermediary business are the most directly. The proportions of large enterprise’s loan and short-term loan declines, at the same time, the proportion of current deposit increases.

Except brought direct impact on commercial bank’s traditional services, disintermediation also promoted the development of modern commercial banks, it forces banks to make great effort to conduct financial innovation, improve their abilities of risk management, and accelerates the process of structural transformation. It also increases sources of finance, and raises the flexibility of company and banks. Acting as a resistless force, disintermediation comes with challenges and opportunities, what commercial banks should do is to take challenges and seize the opportunities.

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