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Disintermediation

By on July 3, 2019

Disintermediation refers to the depositors’ practice of withdrawing their savings from financial institutions such as banks, to invest in other assets for higher returns.

The trend of disintermediation as been rising since the turn of the millennium as more and more consumers become aware of the excruciatingly low interest rates that banks are paying depositors for their savings.

Because the interest rates that banks pay to consumers are lower than inflation, people would eventually find that the value of their dollars are worth much less years later.

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The most common asset that people are buying into are treasury bonds.

These are considered safe assets and can often generate a return many times the interest of savings accounts.

Consider that financial institutions also purchase binds in the equity markets with the funds collected from depositors.

So in effect, disintermediation means that consumers are booking in the profits for themselves rather than letting the banks make money out of them.

There is this argument that people who do this take on far greater risks of losing their money.

Since bonds are generally safe, it is only riskier when the money is used to invest in other more volatile assets like stocks and ETFs.



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