(b) The Facts: Shifts in Intermediary Market Shares. Developments over the past
several decades in intermediation processes and institutional design across both time
and geography are striking. In the United States, “commercial banks”—institutions
that accept deposits from the public and make commercial loans—have seen their
market share of domestic financial flows between end users of the financial system
decline from about 75% in the 1950s to under 25% today. In Europe the change has
been much less dramatic, and the share of financial flows running though the balance
sheets of banks continues to be well over 60%—but declining nonetheless. And in
Japan, banks continue to control in excess of 70% of financial intermediation flows.
Most emerging market countries cluster at the highly intermediated end of the spec-
trum, but in many of these economies there is also factual evidence of declining mar-
ket shares of traditional banking intermediaries. Classic banking functionality, in
short, has been in long-term decline more or less worldwide.
Where has all the money gone? Disintermediation as well as financial innovation
and expanding global linkages have redirected financial flows through the securities
markets. Exhibit 2.3 shows developments in the United States from 1970 to 2000,
highlighting the extent of commercial bank market share losses and institutional in-
vestor gains. While this may be an extreme case, even in highly intermediated finan-
cial systems like Germany (Exhibit 2.4) direct equity holdings and managed funds
have increased from 9.6% to 22.7% in just the 1990–2000 period.
Ultimate savers increasingly use the fixed-income and equity markets directly and
through fiduciaries, which, through vastly improved technology, are able to provide
substantially the same functionality as classic banking relationships—immediate ac-
cess to liquidity, transparency, safety, and so on—coupled to a higher rate of return.
The one thing they cannot guarantee is settlement at par, which in the case of trans-
actions balances (e.g., money market mutual funds) is mitigated by portfolio con-
straints mandating high-quality, short-maturity financial instruments. Ultimate users
2.2 A STYLIZED PROCESS OF FINANCIAL INTERMEDIATION 2 • 7Source:Federal Reserve.
Exhibit 2.3. U.S. Financial Assets, 1970–2000.
0102030401970 1980 1990 2000Commercial BanksInsurance CompaniesPension Funds MutualFundsPercent