BTL 786- Flow of Funds - Intermediation & Disintermediation

 

The Banking Tutor’s Lessons

BTL 786                                                                   21-05-2025

Flow of Funds - Intermediation & Disintermediation 

The flow of funds involves the movement of capital between different sectors of the economy, with intermediation and disintermediation being key processes within this flow. 

Intermediation involves financial intermediaries like banks facilitating the transfer of funds, while disintermediation bypasses these intermediaries, allowing direct transactions between savers and borrowers. 

Intermediation is the process where financial institutions (like banks, mutual funds, insurance companies) act as middlemen, taking funds from savers and lending them to borrowers. These institutions provide benefits like: 

Lowering transaction costs - They reduce the effort and cost associated with finding a direct match between a saver and a borrower. 

Pooling risk - They spread risk across many savers and borrowers, making it less risky for individuals to invest. 

Providing liquidity - They make it easier for savers to access their funds when needed and for borrowers to obtain funding. 

Disintermediation is the process where funds move directly between savers and borrowers, bypassing financial intermediaries. This can happen in a few ways: 

Direct investment: Savers can invest directly in stocks, bonds, or other securities without going through a broker or bank. 

Fintech and blockchain: Technologies like FinTech and blockchain can facilitate direct peer-to-peer lending or investing. 

Increased access to direct markets: Initiatives like the Capital Markets Union in Europe aim to create a more direct and efficient flow of funds. 

Flow of Funds (i.e. the movement of capital between different sectors - e.g., households, businesses, government) within the economy is influenced by both intermediation and disintermediation. 

Financial intermediation is crucial for directing funds to productive investments, while disintermediation can offer greater flexibility and efficiency in certain situations. 

Sekhar Pariti

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