Disintermediation occurs when investors withdraw funds from banks to invest directly in higher-yielding instruments. Which option best describes this concept?

• A. Intermediation via bank loans
• B. Direct investment by savers in securities
• C. Saving in a bank deposit
• D. Lending to government

Answer: (C)

Disintermediation is when savers bypass banks and put their money directly into financial instruments like bonds or other securities to aim for higher returns. That direct shift from bank deposits to market instruments is why the idea is described as direct investment by savers in securities.

Think of it as funds moving out of the banking system’s typical channel (deposits that the bank would then use for loans) and into directly purchased securities. Saving in a bank deposit keeps funds with the bank and uses the bank as the intermediary, which is the opposite of disintermediation. Intermediation via bank loans describes the traditional flow through banks, not bypassing them. Lending to government could involve buying government securities, which is a form of investing in securities, but the broader and clearer description of disintermediation is savers investing directly in securities rather than routing funds through a bank.