The new banking disintermediation. ( by Alessandro M. Rinaldi * )

In the 1980s, the development of so-called para-banking activities, particularly those which channeled funds outside the traditional banking circuits to companies or investment initiatives, was often associated with the phenomenon of banking disintermediation and with the stringent limitations imposed on banking system. At the time, the increase in the cost of banking intermediation made it convenient to resort to other forms of finance, even if riskier for the counterparties, and gave rise to new instruments, almost always prepared by intermediaries outside the banking world to finance direct investments in economic-productive initiatives. In turn, the limitations imposed on credit growth prompted banking and non-banking operators to offer, and economic operators to use, services with a financial content not subject to containment measures. Thus towards the end of the 1980s and in the early 1990s, quotas and disintermediation contributed, in the sense of "supporting" the diffusion of activities other than the banking ones, developing market-oriented activities, but not yet capable to fully justify the evolutionary process towards market structures more adherent to an advanced economic system, a system that would have arrived, however, late compared to the evolutionary processes achieved by other economies.

Nowadays, the growth of banking and financial competition, due to the entry into the market of new subjects such as FinTech companies, is modifying the structure of the system through a redefinition of the role of financial intermediaries and their business models and above all of the role of intermediation both in the world of payments and in that of credit, rekindling the issue of banking disintermediation and transforming it into financial disintermediation. The protagonist of this disintermediation is the financial innovation that now invests all traditional banking services that today bear much better known names in English such as crowdfunding, employment with peer-to-peer lending, commercial buy now and pay late, or like the widely used payment services such as digital wallets that we can put on mobile phones, wearable payments, or the much more convenient instant payments for real-time transactions, useful for exchanging money on the spot. We also have innovation in asset management tools such as asset allocation based on artificial intelligence and "assisted" consultancy through robo-advisors and so on.

Decentralized ecosystems that promote disintermediation, mainly through digital protocols and apps that work on distributed technologies, have experienced very rapid development in recent years, initially stimulated by the pandemic but then evolved thanks to ever faster and more complex platforms that have simplified the use of everyday tools such as mobile phones, tablets and PCs.

Until a few years ago the financial market, which traveled at zero rates both on deposits and on the money market, rewarded two forms of employment: the stock market and liquidity. The latter was deposited in thousands of banks which for several years found themselves even a little embarrassed to keep that money still in their current accounts, because it cost them up to 30/40 cents and they certainly couldn't charge it to account holders. In return, the bankers hoped that the account holder would purchase other services to offset the costs of the deposit. The amount of bank deposits in Italy alone exceeded the record of 1,855 billion in January 2022 and the question was asked where they could be invested by "depositors". But the most important and above all the most insidious question, which few thought about, was how the banks would manage these deposits. We learned the answer in recent days from some banks and not by sifting through their financial statements but by reading the breaking news from CNN: they had "temporarily parked" them in fixed-income securities with more generous coupons, gradually increasing, in bonds with higher yields to 0, to profit on the differential, thanks to the stickiness of the banking system to adapt to the increase in interest rates. Zero cost on deposits and increasing revenues on interest on securities. Then the recovery of loans or the quarterly update of variable interest on mortgages would have done the rest. An enormous mass of deposits (which is debt for the banks towards current account holders) substantially free and an active correspondent which was beginning to yield well, leaving an ever greater spread to pass through the economic accounts of the system. Less than a month ago all the investment banks launched a unison "buy" on the banks of the entire western world.

It is a pity that while the securities in the portfolio purchased over time, although they gave something, they gradually lost value as the Fed in the meantime increased rates at an unceasing pace up to 4.75%/5%. The money machine was suddenly found to be defective and its superbonus suddenly ended. When a few more account holders, than predicted by the money managers, were preparing to withdraw, or rather to "enter" their sight deposits on the app of their mobile phone, perhaps to obtain a return in excess of the zero offered on the accounts and then , subsequently, for fears of getting caught in the bail-in and losing their deposits. The tam-tam travels at the speed of 5G and everyone runs to move the money to the largest and safest bank. What will the treasurer of the Bank do then? Will he have to sell the securities he had parked which in the meantime had depreciated by 20% following the rate hike or take the books to court? The sudden rise in rates, the continuous announcements of new government issues come to everyone's attention. The depositor must defend himself from inflation, the screeches on all the news of new increases induce the depositor to run to subscribe for government bonds that promise returns that until yesterday seemed impossible. Some who were about to be convinced to put them on the stock markets reverse course and begin to pass purchase orders for government bonds, draining liquidity from current accounts. Even those who had invested in the stock market, disappointed by the sharp declines, abandon risk capital and put everything on debt capital. A phase of disintermediation begins again, of replacing deposits with financial investments. Central Banks around the world had studied this phenomenon well and I also have reports on what happened in the event of a reversal of monetary policy at low rates, but it all remained in the drawer of some analysts. The sudden evolution of the hike policy carried out by central banks around the world, which chased each other, had the effect a bit like a tidal wave which, instead of rising slowly over time during the night, making the marine ecosystem get used to the new level of the rising water, instead becomes an impetuous wave as high as a building that crashes against the coast with unheard-of violence.

We have witnessed the first crashes of the banks that had not foreseen the shock wave and that had profited far too much on the forward spreads of the rates, but the tsunami of the rates could still impact the financial system, the economic-industrial system and again the banking system. Then the central banks that had simultaneously drained liquidity with quantitative tightening and raised rates to govern inflation and bring it back to the 2% target, reversed course and injected infinite liquidity, absorbed in a few days by the system and limited the rise in taxi. But then one wonders whether the rules are used to discipline the market or simply to satisfy a power of political control?

If the central banks bail out everyone, it is useless for them to implement restrictive monetary policy, because if they have to issue a rule first and then the first person to break it is bailed out, it is worth changing the method. We could repeat the famous saying: we don't tell daughter-in-law to make mother-in-law understand! In other words, if we have to cool down inflation, then we act on the prices of goods instead of on the prices of money. Why were central banks so quick to raise rates? Didn't they say inflation was temporary? Could we stay with negative real interest for another 6 months? What was the problem?

Today, the companies that can, given the new business model, offload the higher financial costs on sales prices and fuel inflation even more. Global wealth means that both companies and savers do not deprive themselves of goods just because they cost more, therefore acting on the cost of money to discourage companies from producing less, only creates (in case) a decrease in the workforce, in how much they will invest in technology to produce more and sell at higher prices, fueling inflation. Nobody seems to want the policy of low growth and low rates any more; the leitmotif seems to be "there is no growth without development and investment" and if on the one hand companies are willing to pay a higher financial cost to see their company expand, on the other both savers and consumers are willing to one to invest at higher rates and the other to spend a little more to buy basic and second-needed goods.

Financial technology and global consumerism are opening up to a new disintermediation, but today it is the central banks rather than the commercial banks that are displaced. The mismatching between deposits and loans is an anomaly of a few banks that have ventured (and not only morally) but the real problem that now grips the market is the technical incapacity of the old banking system and the new regulators which has neither people nor nor adequate tools to be implemented in an instant and which can fix a crisis of this size.

Alessandro M. Rinaldi

* President of GHC – Garofalo Health Care

Director of Banca Patrimoni Sella & C.

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The article The new banking disintermediation. ( by Alessandro M. Rinaldi * ) comes from Scenari Economici .

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This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/la-nuova-disintermediazione-bancaria-di-alessandro-m-rinaldi/ on Sat, 25 Mar 2023 07:00:13 +0000.