An important role in the sustained functioning and the ability of revenue generations for the global finance industry, have been played by the middle men. A crucial link operation between the capital providers and the capital end users are in the hands of them. These middle connection plays an effective role and has been pivoting in enabling the financial and monetary systems to operate smooth. As the recent studies show these middlemen are about to be an endangered species. Typically they operate either as a broker or a more important role of bearing the risk and receiving compensation themselves for doing so. But being a broker means the work is to sit between two parties in a transaction facilitating the connection between the buyer and seller.
Pertinent questions raised surrounding the efficiency (or inefficiency) of the global financial system during the Financial Crisis of 2008. And the focus was mainly on the importance and requirement of these intermediaries, whether they were necessary or not. It led to a strong incline towards the disintermediation to emerge in the last few years with the process well underway across several distinct areas within the banking and finance sphere.
According to “Financial Disintermediation in International Markets’ and Global Banks’ Funding Models”, a paper published by José María Serena Garralda of Banco de España, global banks have been reducing their cross-border positions and reversing the build-up observed prior to the crisis, which was attributed to “centralized funding structures”, as well as reducing their wholesale funding (that is financing from non-retail sources, such as interbank loans). “Today, these global banks’ funding structures are shifting in parallel to cross-border bank deleveraging. Wholesale funding is contracting, as part of broader shifts towards more stable funding sources.” she said.
“The disintermediation process is already well engaged in Europe. Investors’ involvement in financing should bring Europe closer to the US model, with financing more equally balanced between banks and institutional investors.” observed Société Générale. And that does not mean that if financial equality being balanced between the banks and the institutional investors take place, he banks will no longer play any role in the funding model, the French bank acknowledged. He also said, “The disintermediation movement is thus a win-win development for the European market, enabling it to adapt to the new regulation and financial paradigm and continue to finance the real economy and economic growth, while combining banks’ historical asset/lending expertise with investors’ long-term funding capacity.”
Banks, play critically important roles with regards to determining the appropriate creditworthiness of borrowers and other counterparties as well as conducting risk management and compliance. Most bank loans are often secured with some form of collaterals whereas this is not the case with disintermediated lending platforms, meaning that borrowers may quickly fall deeply into debt if they fail to pay high interest rates on unsecured loans.
Disintermediation represents an exciting advancement in financial services by providing the most direct, efficient way for transactions to occur but it is unlikely to necessitate a complete transition within the industry. Middle men still have a wide role to play in certain situations and thus the two models of disintermediation and intermediation are to be co-existing and operating side by side. This also gives the market participants a wider range of options to choose from. But the disintermediated products and services are representing an evolution in this sector and the traditional process are to be minimalized. This itself will take the financial industry on a better ride.