Disintermediation

Published February 2000

In capital markets, disintermediation refers to the practice by investors of shifting their investments away from intermediate financial institutions, such as banks and savings institutions, to direct investments at a higher rate of interest in the securities and obligations of primary borrowers. This structural change in the financial services industry raises interest rate expectations of investors and, hence, raises the cost of the supply of funds to intermediate credit sources such as banks and savings institutions. Since intermediate financial institutions are the prime source of construction financing, disintermediation has the effect of raising construction costs.