Bank disintermediation and deposit transformation

Financial intermediation means standing between those with savings (depositors) and those who need funding (borrowers). The bank collects deposits and grants loans: it does not merely "keep" the money, it channels it toward productive investment. Without it, savers and borrowers would have to find each other one by one — slow, costly, risky. The bank pools funds, screens and monitors risks, and thereby makes credit accessible to the whole economy.

The core of banking is maturity transformation: the bank borrows short (deposits, callable at any time) and lends long (loans over years). This creates value, since dormant savings become investment. But it creates fragility: if all depositors demand their money at once, the bank — whose assets are tied up in loans — cannot pay. That is the "bank run." Two safeguards stabilize the system: deposit insurance and the lender of last resort (the central bank).

We assume deposits make loans; the reverse is just as true: loans make deposits. When a bank grants credit, it writes the sum into the borrower's account — it creates money. This is money creation through credit, framed by reserve requirements and prudential regulation. The banking system as a whole thereby multiplies a base of central-bank money into a far larger volume of credit and deposits. This mechanism rests on the presence of deposits: remove them from the system, and it seizes up.

Disintermediation is the reverse move: savings leave banks for other channels — financial markets, money market funds, and today stablecoins. Money then flows directly into securities (government debt, bonds) without passing through bank lending. The benefits are real: sometimes better returns for the saver, more competition. But so is the risk: starved of deposits, banks lend less, especially to the borrowers only they finance (small businesses, households, farmers). Disintermediation shifts credit — and the power to create it.