Deposits vs. Investments Time to Settle This Debate: New Study Puts Some Numbers to the Matter of Disintermediation, Which Should Help Defuse a Long-Simmering Dispute

By Kehrer, Kenneth | ABA Banking Journal, June 2007 | Go to article overview

Deposits vs. Investments Time to Settle This Debate: New Study Puts Some Numbers to the Matter of Disintermediation, Which Should Help Defuse a Long-Simmering Dispute


Kehrer, Kenneth, ABA Banking Journal


Ever since banks and savings institutions began selling mutual funds and annuities in the early 1980s, there has been tension between the advocates of transforming the bank branch into a financial services store and the executives responsible for the traditional core business of banking--collecting deposits and making loans. By selling investments a bank is essentially converting some spread income from deposits into fee income. Alarmists in the traditional banking camp argue that by selling investments a bank could disintermediate itself out of existence.

Advocates of the "bank as a financial services company" counter that the bank's customers need alternative investments, and in fact will buy the investments from some other source if the bank does not offer them. Since the bank's competitors are selling investments, by eschewing investment sales the bank is ceding its customers' investment business to another bank or securities firm that is also offering banking services like loans and federally insured deposits. By letting customers establish relationships with competitors that also provide banking services, the bank is not just at risk of losing some deposits, but is placing its whole customer relationship at risk.

Also, many banks have been trying to diversify away from the spread business. By building up their fee business, banks can insulate themselves more from cyclical loan demand. Indeed, many analysts will downgrade a bank's stock if the bank has less fee income than its peers. But the problem is that the fee income is earned in many cases by cannibalizing the bank's own deposits. Thus, instead of a bank augmenting its spread income with some fee income, the fee income in fact is cutting into the spread income. Deposit products and investment products compete for some of the same dollars.

The advocates of investment sales argue that even though some investment sales cannibalize deposits, the commissions on mutual fund and annuity sales are much larger than the spread income on deposits. But the deposit guardians point out that this spread is earned year after year.

Despite this internal conflict, about half of the banks participating in the annual bank brokerage surveys conducted by Kehrer-LIMRA actively try to convert maturing certificates of deposit into investment sales. But this activity does seem to be cyclical, rising during periods of slack loan demand and shrinking when banks are more fully loaned up. These annual surveys (the Kehrer-ENSI Financial Institution Investment Program Benchmarking Survey) also indicate that many banks are not particularly concerned with disintermediation. In 2006 63% of the banks reported that they provide customer lists to the bank's brokers. And 48% do not even monitor the extent to which investment sales cannibalize deposits.

Ups and downs of disintermediation

The annual Kehrer-ENSI Financial Institution Investment Program Benchmarking Study has measured the extent of disintermediation since 1991. The 2005 study covered 84 banks, credit unions, and third party brokerages that collectively accounted for over half of all bank mutual fund and annuity sales.

The benchmarking data indicate that in 2005 34% of the funds used to purchase an investment in a typical bank were drawn on that bank's interest-bearing deposits.

Over the years, we have observed a general downward trend in this statistic. In the mid 1980s, when S&Ls were just beginning to sell annuities, it was common for institutions to report that 80% of the dollars used to purchase investments came from their own deposits. By the time we began systematically measuring disintermediation, the average bank reported that 60% of the investment sales were funded by their own deposits. This statistic generally declined year by year, reaching a low of 30% in 1999, as deposits were leaving banks in droves, before moving back up after 9-11 to 44% in 2003, as assets rushed back into the safe harbor of bank deposits. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Deposits vs. Investments Time to Settle This Debate: New Study Puts Some Numbers to the Matter of Disintermediation, Which Should Help Defuse a Long-Simmering Dispute
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.