Disintermediation

Disintermediation - Why? Impact of Legislation on Branching...

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Disintermediation Disintermediation exists in all industries and ‘cuts out the middleman’: Internet  Retailers Amazon  Bookstores Netflix  Video Stores Wikipedia  Encyclopedias Craigslist  The Classified Ads In banks, the disintermediation of bank deposits was mutual funds. 1
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Disintermediation MMMF balances are not guaranteed. MMMFs doubled between 2005 and 2009. Investors perceived no risk differential between bank accounts and MMFSs (invested in high-quality, short-term, liquid instruments), yet could earn a higher return. These funds are not subject to reserves and to less regulation, making it an unfair playing field. 2 WSJ – 8/19/11
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WSJ – Money Funds 3 The Fed backstopped Reserve Primary Fund (and like funds) to stabilize the money markets and avoid a ‘run.’ This was an unpopular move from the bank’s viewpoint.
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Unformatted text preview: Why? Impact of Legislation on Branching 4 Interstate banking passed in 1980s and branching across state lines passed in 1994, contributing to mergers and acquisitions. Branch Office Deposits By State 5 A Glimpse at the Financial Crisis After the interstate banking law changes, the industry quickly paired up and many mergers occurred. Five years later, the easy gains from consolidation were over (banks could not maintain growth through mergers and cost cuts). Many took the next logical step, which was to extend more consumer loans. The quality of these loans decreased as the numbers increased, creating higher default risk. At the same time, executive pay was soaring, which can encourage executives to take on greater risk. 6...
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Disintermediation - Why? Impact of Legislation on Branching...

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