withdrawal of funds from interest-bearing deposit accounts when rates on competing financial instruments, such as money market mutual funds, stocks, bonds, and so on, offers the investor a better return. Disintermediation was at its peak in 1966 when Regulation Q interest rate ceilings prevented banks and savings institutions from competing effectively with nondepository institutions, such as brokers, disrupting the banks' ability to lend. The double-digit inflation of the late 1970s, which caused many consumers to put their liquid assets in short-term money funds, led to federal legislation in 1980 deregulating deposit interest rates, allowing banks and thrifts to compete more effectively with nonbank financial intermediaries.
movement of savings from banks and savings and loan associations directly into money market instruments, such as U.S. Treasury bills and notes. When interest rates are rising, investors can often receive a higher return by investing directly rather than going through a financial intermediary.
movement of funds from low-yielding accounts at traditional banking institutions to higher-yielding investments in the general market-for example, withdrawal of funds from a passbook savings account paying 51/2% to buy a Treasury bill paying 10%. As a counter move, banks may pay higher rates to depositors, then charge higher rates to borrowers, which leads to tight money and reduced economic activity. Since banking deregulation, disintermediation is not the economic problem it once was.
flow of funds out of one financial instrument, whose interest rates are low, into another financial instrument, whose interest rates are higher. In the early 1980s, insurance companies experienced disintermediation as whole life policies were surrendered for their cash values and these sums were then transferred to higher interest-paying noninsurance products. Because of this situation, interest sensitive policies were developed by insurance companies.
situation when deposits are removed from a financial intermediary, such as a Savings and Loan associations, and invested in other assets, generally for the purpose of obtaining higher yields.
