There is a paragraph about the history of credit rating agencies that I don't understand "For a few decades, ratings were nothing more than private assessments, no different from any other form of consultancy provided to investors. 
Born out of a need in the burgeoning industrial world of the late nineteenth century, the power of credit agencies increased with the shift affecting the financial industry in the interwar period, especially the banking sector. 

Traditionally, banks had been the primary source of funding for firms and corporations. They were the link between lenders (mostly private savings, i.e. deposits) and borrowers. 
Credit defaults (and the risk thereof) were shouldered by them and usually did not affect depositors. 
Therefore banks ‘acted as hybrid institutions of collective action, between the state and the market’, controlling the risk and reducing ‘the uncertainties for the political authorities, as well as for borrowers and lenders’. 

Yet the increased downward pressure on capital costs experienced during and after the Great Depression incentivized direct market participation for banks (in form of financial and investment products) and eventually decreased their role as mediators between lenders and borrowers. 

As a result, such ‘disintermediation’ transformed banks from agents of self-regulation to market participants. 
The decentralization of capital allocation (away from banks), directly connecting borrowers and lenders, accentuated the problem of asymmetrical information in the market and thereby strengthened the role of rating agencies."


What does "decreased their role as mediators between lenders and borrowers " mean when it is already said that "credit defaults (and the risk thereof) were shouldered by them(banks) and usually did not affect depositors." 
What does "the increased downward pressure on capital costs* experienced during and after the Great Depression incentivized direct market participation for banks" mean? 
That cheap credit turn banks into investment firms? 
What does the "the decentralization of capital allocation (away from banks)" mean? 
I think it means that the now investment firms, formerly banks are now trying to sell people bad performing stock on their books, while their consumers are trying to get loans ?
It’s an extremely long-winded way of saying that lending moving from bank lending to bond/money markets. The fact that depositors did not take much direct credit risk is a red herring.
I don’t see the financial logic, but yes, the banking sector moved from being lenders to underwriters of securities.
Bond and money markets are decentralised: instead of a single bank making a loan, there is a group of investors buying a new bond or money market instrument.


The passage is inherently confusing, as it is based on a couple of questionable premises.