Bank Disintermediation
The factors that have been responsible for bank disintermediation
In my opinion, there are three major arguments for the factors that have been responsible for bank disintermediation. First, pareto improvement (Vilfredo Pareto), second, reputation acquisition in debt markets (Diamond, D., 1989), third, corporate finance theory (MM & Trade-off Theory). 1. Pareto Improvement (Vilfredo Pareto)
According to Pareto efficient (Vilfredo Pareto), if economic allocation in any system is not Pareto efficient, there is potential for a Pareto improvement—an increase in Pareto efficiency: through reallocation, improvements to at least one participant 's well-being can be made without reducing any other participant 's well-being
When the Pareto efficient is applied to whole financial market, it means the financial resource distribution will achieve ‘Pareto Improvement’. Under me economic conditions, financial market do not hinder the development of the real economy by itself and financial market can raise economy to run efficiency through own reform. In this situation, the financial resource distribution will achieve Pareto Improvement. The development of financial market wants to achieve Pareto Improvement of the financial resource distribution. This objectively changed the pattern that commercial bank is one side alone in the financial market. Because the directly financing is emerged, the financial resource distributions have achieved Pareto Improvement. 2. Reputation Acquisition in Debt Markets (Diamond, D. , 1989)
The traditional theory of financial intermediaries, such as commercial bank, considered that it can reduce transaction costs by economies of scale. Meanwhile, financial intermediaries also can effective avoid adverse selection and moral hazard because of the information asymmetry of the supply and demand sides. Thus, money providers do not directly provide money to the money demanders, but by using financial intermediaries to do this process:
In my opinion, there are three major arguments for the factors that have been responsible for bank disintermediation. First, pareto improvement (Vilfredo Pareto), second, reputation acquisition in debt markets (Diamond, D., 1989), third, corporate finance theory (MM & Trade-off Theory). 1. Pareto Improvement (Vilfredo Pareto)
According to Pareto efficient (Vilfredo Pareto), if economic allocation in any system is not Pareto efficient, there is potential for a Pareto improvement—an increase in Pareto efficiency: through reallocation, improvements to at least one participant 's well-being can be made without reducing any other participant 's well-being
When the Pareto efficient is applied to whole financial market, it means the financial resource distribution will achieve ‘Pareto Improvement’. Under me economic conditions, financial market do not hinder the development of the real economy by itself and financial market can raise economy to run efficiency through own reform. In this situation, the financial resource distribution will achieve Pareto Improvement. The development of financial market wants to achieve Pareto Improvement of the financial resource distribution. This objectively changed the pattern that commercial bank is one side alone in the financial market. Because the directly financing is emerged, the financial resource distributions have achieved Pareto Improvement. 2. Reputation Acquisition in Debt Markets (Diamond, D. , 1989)
The traditional theory of financial intermediaries, such as commercial bank, considered that it can reduce transaction costs by economies of scale. Meanwhile, financial intermediaries also can effective avoid adverse selection and moral hazard because of the information asymmetry of the supply and demand sides. Thus, money providers do not directly provide money to the money demanders, but by using financial intermediaries to do this process:
References: Pareto efficiency from Wikipedia, the free encyclopedia http://en.wikipedia.org/wiki/Pareto_efficiency Diamond, D. (1989), "Reputation Acquisition in Debt Markets," Journal of Political Economy, 97(4): 828 862 Donald E. Campbell and Jerry S. Kelly (1994) "The American Economic Review," American Economic Association, 1994 David Hillier, Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, and Bradford Jordan (2010) Corporate Finance. European edn. McGraw-Hill Walmsley, J, New Financial Instruments, Wiley, 2nd Edition, 1998, Chapter 8. Profits and Balance Sheet Developments at U.S. Commercial Banks Federal Reserve Bulletin, 1985-2005 Flow of Funds Accounts of the United States, Board of Governors of the Federal Reserve System, Washington D.C. 2055. B.102 Balance Sheet of Nonfarm Nonfinancial Corporate Business, P100