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Shackled banks face up to disintermediation threat

As the world’s banks delever they face a new threat – disintermediation. It means their future competition is likely to come from institutions that have traditionally been clients. Real-money investors, specialist credit funds and big asset managers are replacing banks in key credit areas. How will banks maintain their relevance in a Basle III world?

Additional reporting by Andrew Capon

Maybe the paranoia is starting to set in after five years of almost incessant banking crisis. The head of global markets at one of the world’s biggest banks is certainly on edge.

His biggest fear? That large buy-side clients are themselves so worried about banks’ inability to supply capital to support market-making that they are setting up crossing networks to internalize buy-and-sell orders between their own funds.

Liquidity has dried up in many financial markets and if the banks won’t help investors buy in and sell out, they must find ways to do it for themselves. The logical next step would be to extend such facilities to other big investors to create some kind of inter-investor broker to cross orders between the big asset managers.

If they are not careful, banks might find themselves disintermediated out of the value chain, especially in trading of illiquid securities.

"Yes, that’s gaining a fair amount of attention," the banker agrees. "But what those investors are not talking about so openly – and yet we know is going on – is that some of the big real-money clients with very large volumes of assets under management are now also hiring originators and syndicators to go directly to the large numbers of corporate borrowers that are not yet used to funding predominantly in the public capital markets.

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