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Disintermediation Revision Notes

g higgs 11 questions

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  1. 1Historically, banking emerged as financial intermediation between [blank_start]depositors[blank_end] and [blank_start]borrowers[blank_end] where banks collect deposits from surplus sectors and lent them to deficit sectors. Disintermediation is the shift away from traditional financial intermediation and towards financial agency in which banks provide advice and [blank_start]placement services[blank_end]. Disintermediation can both include changes to traditional lending (such as [blank_start]securitisation[blank_end]) and/or direct lending to companies by non-bank [blank_start]investors[blank_end].
    Disintermediation has largely been made possible through the [blank_start]securitisation[blank_end] process, which is a type of financial innovation resulting from a combination of deregulation, reregulation and globalisation.
    1. Adepositors
    2. Bborrowers
    3. Cplacement services
    4. Dsecuritisation
    5. Elenders
    6. Fsecuritisation
  2. 2Securitisation is useful to investors because it cuts out the middle man and sees greater returns on investments. Modern investors tend to be more sophisticated and in a low yield environment, they don’t want to lose out on fees (ISA’s offer less than 1% these days)(Lloyds, 2018). More, sometimes it is more risky to give money to the banks, and there credit ratings are worse than large MNCs (Walmart has [blank_start]Aa2[blank_end] rating compared to Barclays’ [blank_start]A2[blank_end]). In 1986 Gardener predicted the rise in treasury functions allowing MNCs to lend directly to clients with lower [blank_start]counterparty[blank_end] risk. Securities have a secondary market and are thus more liquid than bank deposits. This has grown through a cycle, more liquid  more participants  more liquid  more participants. Moreover, it provides investors with a much wider range of investment instruments. More, this liquidity provides banks with greater trading revenues and they can increase these profits.
    1. AAa2
    2. BA2
    3. Ccounterparty
  3. 3Gardener (1986) recognised two schools of thought, ‘market school’ who believe securitisation implies a continuing and inevitable decline in roles of international banks and ‘banker school’ who believe securitisation is merely one more step in development of modern banking firm. This relies on banks being able to adapt to survive and prosper. Since these remarks were made we’ve clearly seen banks survive through the securitisation era through an agency role, but advances in disintermediation continue to threaten their importance in the future and there is debate over whether they can lose this too.
    Lew Ranieri from Salomon was a trader who is known as the father of mortgage backed securities, being named as one of the greatest innovators in the past 75 years by [blank_start]Businessweek[blank_end] in [blank_start]2004[blank_end]. However, he has also been blamed largely for the financial crisis, with Keys et al (2008) empirical evidence that securitisation led to reduction in credit quality.
    1. ABusinessweek
    2. B2004
  4. 4Gardener (1986) says 70s and 80s oil price rises, deregulation and reregulation, were early drivers of disintermediation such as focus on bank capital ratios. A series of banking problems and crises helped erode banks’ [blank_start]comparative advantages[blank_end] in international credit intermediation thus markets have tended to become increasingly securitised at the expense of direct lending. In addition, [blank_start]volatility[blank_end] of interest rates and exchange rates during turbulent 70s environments helped stimulate the financial innovation.
    1. Acomparative advantages
    2. Bvolatility
  5. 5Deregulation in the UK in the 70s ([blank_start]1971[blank_end] Competition and Credit Control, [blank_start]1979[blank_end] Exchange Control Act, [blank_start]1971[blank_end] Hire Purchase [blank_start]Control[blank_end] Act) and the US abolishment of Reg Q in [blank_start]1982[blank_end] means Interest Rate cartels were abolish hed, and bankers no longer guaranteed profitability, had to become more innovative. This also occurred due to increased competition as a result of phases 2 and 3 of deregulation. (In [blank_start]1986[blank_end] in the UK, the Financial Services Act was passed to allow commercial banks to enter the securities business; likewise US Garn St Germain Act [blank_start]1982[blank_end]. The [blank_start]Building Society Act 1986[blank_end] allowed building societies to offer banking services too. Phase 3 saw retail stores entering the market, with Tesco Finance, M&S Money, Virgin, as long as they can pass the fit and proper tests within [blank_start]prudential[blank_end] safeguards.)
    Supervisory regulation led to securitisation as banks relied on fee income after the [blank_start]1982[blank_end] debt crisis, as supervisory attention increased on capital ratios.
    1. A1971
    2. B1979
    3. C1971
    4. DControl
    5. E1982
    6. F1986
    7. G1982
    8. HBuilding Society Act 1986
    9. Iprudential
    10. J1982
  6. 6Additionally, the 1990s saw a proliferation of cross-border securitisations as OECD countries opened banking to foreign banks (Mullineux 2012), the Second Banking Directive [blank_start]1989[blank_end] of the Euro allowing for firms to passport rights across the Eurozone. Due to the nature of securities it was easier to find more buyers across the globe.
    1. A1989
  7. 7Basel I and II also encouraged securitisation as moving risk OBS allowed them to avoid capital charges, avoiding 100% risk weights. These regulations also fail to cover the entire financial system fairly (Wignall and Atkinson, 2010) says shadow banking needs more regulation. Firms like Blackstone lend to very high risk clients, they bought portfolios from Lloyds and RBS in 2012 as Eurobanks pressured reductions in property exposures. Some call for regulation to be increased to HFs and PE firms, but this just tends to push offshore and lead to more financial engineering.
    Societe Generale say the disintermediation process is well engaged in Europe, but banks retain role in providing [blank_start]structuring[blank_end] and [blank_start]servicing[blank_end] [blank_start]functions[blank_end] requiring banking [blank_start]knowhow[blank_end] and high barriers to entry.
    1. Astructuring
    2. Bservicing
    3. Cfunctions
    4. Dknowhow
  8. 8More recently, there are a number of technological threats to the banks role in agency:
    ETFs have made debt capital markets accessible to more investors, attracting $[blank_start]140[blank_end]bn in 2017 (Wigglesworth 2017). Another significant example of reduction in the agency role is [blank_start]Spotify[blank_end], they did a direct listing on the NYSE rather than having the usual Investment Banks underwriting shares, this was because the company was well understood worldwide and managed to save millions of pounds (FT, 2018).
    Additionally, [blank_start]Abbot[blank_end] and Gibbard (2017) reports that Fintech threatens bank lending through ‘[blank_start]Cloud[blank_end] Funding’. E-commerce retailers such as Amazon are looking to directly lend to marketplace sellers and small business users of their services.
    Wigglesworth (2018) says that fixed income trading technology is disrupting the $[blank_start]50[blank_end]trn market, due to electronification of corporate debt expected in the near time. If it happens, bankers will likely lose more of their agency role, instead there will be lower fees and lower costs.
    1. A140
    2. BSpotify
    3. CAbbot
    4. DCloud
    5. E50
  9. 9In response, several investment banks have shifted the attention of their business. UBS has moved very OBS, it does not typically lend to its Investment Banking clients and has turned its attention to wealth management where profits are higher and risks are low.
    Due to quantitative easing the interest rate environment is currently very low, the rate banks receive from loans is subsequently also very low, for example BNP Paribas make a loss on most of their revolving credit facilities in the hope they earn it back through [blank_start]advisory[blank_end] fees (BNP Paribas Internship).
    1. Aadvisory
  10. 10The latest development in bank disintermediation revolves around blockchain technology. This is technology for [blank_start]storing[blank_end], [blank_start]tracking[blank_end] and [blank_start]processing[blank_end] information ([blank_start]Obie[blank_end], 2017). In [blank_start]October[blank_end] 2017 it was announced 7 major global banks including BNP Paribas partnered with fintech firms to develop Blockchain based solutions for a [blank_start]syndicated[blank_end] [blank_start]loan[blank_end] marketplace. HSBC used a blockchain process to process shipping documents for [blank_start]soy[blank_end] [blank_start]beans[blank_end] in May 2018, taking 24 hours instead of 5 days, saying it will slash costs and boost trade by billions. On the other hand, Bart Ras from the Supply Chain Finance Community Forum (2017) says banks excited by Blockchain are either clueless of happy to be disintermediated, “there will be a lot of losers”.
    1. Astoring
    2. Btracking
    3. Cprocessing
    4. DObie
    5. EOctober
    6. Fsoy
    7. Gbeans
    8. Hsyndicated
    9. Iloan

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Copyright George Higginson
Author
g higgs
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English
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