•
Intermediation vs. Disintermediation
•
What do banks do?
•
Diversification of banking activities
•
The expansion of banks specialized in non-banking
financial services
•
Intermediation vs. Disintermediation
-
Debt economy vs market economy.
- Indirect funding vs direct funding.
- Commercial bank vs Bank of the market.
Debt
economy is characterized by bank debt, so firms mainly resort
to banks to fund their projects; and banks resort to the central
bank to fund themselves again.
Debt
economy is characterized by indirect funding because banks play
the role of an intermediaries between agents that have resource
surplus and agents that need funding. (Here, we are talking
about Intermediation)
Market
economy means that the agents needing funding can have it directly
from the market; it means agents that have resource surplus
without going through a bank. It is the case with direct funding.
(Here, we are talking about the phenomenon of Disintermediation)
Intermediation:
the essential of the external funding of the firms is made through
banks.
Disintegration:
There is no monopoly; everyone can have access to the market
without any banking intermediary. Firms can get funding thanks
to a stand-by credit instead of being indebted to a bank.
Main
functions of intermediation :
-
The conversion of liquid assets: of savers who do not have any
plans for their money to firms that need it. (Retail dealer)
-
The mutualisation of the risks: the borrower does not try to
know where the money comes from, and the saver does not try
to know where the money goes, it is the bank that mutualizes
the risks and the money.
- Information: banks have ways to know how to adapt to firms
activities.
Advantages
of the intermediary bank towards the financial market:
Banks
:
- Offer material and intellectual services.
- Manage means of payment.
- Manage savings.
- Have access to the market.
- Preservation of stocks.
Old
functions, new ones: even if it is a market economy, banks are
able to intervene and solve funding issues if there are some.
Moreover,
banks are able to get information and to analyse (knowledge
of the trade – ability to catch sight on the customers’
financial situation- ability to face up to anti-selection which
means avoiding it- watching customers by avoiding ethical hazard
(it is the knowledge by information). Banks also have means
of adaptation.
• What do banks do?
Banks
are the key actors of the funding of the economy. They drain
the savings of the agents with financing ability (households,
firms) and they allocate credits to agents with funding deficit
(firms, State and civil services). On that account, they are
in competition with:
- Various markets of negotiable stocks (shares, bonds, commercial
papers)
- Other financial intermediaries (savings institutions, insurance
companies…)
The
main specialty of banks comes from the particular nature of
“insight” deposits, one of the major components
of their liabilities. Insight deposits are the main form of
currency in contemporary economies. As a result the traditional
activity of banks is organized around three major lines:
- Information brokerage (between capacity agents and funding
deficit)
- Qualitative transformation of assets (unitary sums, dates
of payment, methods of payment, diversification of risks)
- Management of payment systems.
Banks
incomes are made up by the intermediation profit margin (interest
margin) resulting from the qualitative transformation of stocks
and from the commissions coming from brokerage activities.
Markets
funds are not as efficient as the financial theory applies.
Banks suffer from various defaults, including transaction fees
and all sorts of externalities (example: private information
that might become public goods). Banks and other financial intermediaries
enable the reduction those transaction fees and overcome those
externalities.
Information
on funds markets is not perfect. Banks take advantage of this
and reduce the inevitable asymmetries of information between
borrowers and lenders. They can restrict the opportunistic behaviours
of borrowers through Anti-selection and moral hazard. They select
borrowers’ plans, they make sure of their good execution
and enforce the clauses in loan contracts.
The private information concerning depositors and borrowers
consists in a specific asset which gives them a monopolistic
power (in relation to negotiable stock markets and other financial
actors), and it is the main source of their franchise.
Besides,
banks provide a liquidity guarantee and they allow savers to
dissociate their inter-temporal profit of consumption from the
updated flows of their incomes. The analyses of the past 25
years allowed us to emphasize banks specificities. They justify
its strong regulation by public authorities, and they have operated
it for a long time in a specific competitive environment.
• Diversification of banking activities
In
the 21st Century, banks are still a central element of well
developed financial markets; however, some banks have extended
their activities beyond traditional and basic banking functions.
The banking sector is usually composed of specific banks that
work in niche markets, and general banks which offer a wide
range of banking services and other funding products, such as
the opening of deposit accounts, loans, brokerage stocks and
life insurances. For example, “private bankers”
accept the deposits of wealthy people and they invest in a large
range of financial stocks. Modern investment banks play a relatively
small part in the deposit service; they work in equities and
bondholders. International banks, even in a limited aspect,
offer almost all financial services and basic insurance banking
services.
• The expansion of banks specialized in non-banking
financial services
Many
savings banks will continue to concentrate mainly on basic banking
activities. However, 5 to 10 important savings banks, in any
occidental countries, have branched out into several financial
institutions where traditional banking services, bulk and retail,
are still major splittings, but a large range of financial services
is also provided. For example, international banks, even when
they are limited, provide almost all the other financial services,
basic insurance banking services.
Non-banking
financial services understand, among other things, unit trust
and investment funds, brokerage stocks, insurances, pension
funds or stocks management. Customers require a set of services
because it is easier to get them that way. For example, the
purchase of a basket of financial services to banks helps its
customers to overcome information asymmetries which make it
difficult to judge the quality. A bank which has a good reputation
as an intermediary can use this reputation to commercialize
other financial services. Thus, some banks could be able to
draw up a competitive advantage and to make profit out of it.
Most of banks are also active in out off balance sheet (OBS)
in order to increase their profitability. OBS tools generate
incomes and they are proper to financial products, and they
do not appear as an active or a passive on the traditional balance
sheet of a bank. Some OBS products have been provided by banks
for many years. They include, among others, credit cards, letters
of credit, issues of stocks, and the operating of deposit systems,
thus acting as the liquidator of a succession, they manage funds,
and have the global holding and the sale of currencies. In addition,
for the past 20 years, an increasing number of banks have used
or given advice on the use of by-products and securitization.
