Commercial and Investment Banking: Analysis of Separation or Unification



This paper discusses the arguments for and counter-arguments against the separation of the services of investment and commercial banks.  It firstly, looks at banking in general and the intermediary role of banks in promoting economic development through the allocations resources, and analyses the key features of main branches of banking including commercial, investment and universal banking.  The paper also deduces the fundamental differences between commercial and investment banking in terms of services provided, regulation, sources of revenue and modes of operations.  The Banking Act of 1933 referred to as Glass – Steagall Act was promulgated in the United States of America to promote the separation of commercial and investment banks, (Tabarrok, 1998; Jackson, 1987; Filipiak, 2009; Mayer, 2009).  This Act was said to be occasioned by the financial crisis of the 1930s where the U.S stock fell by 90% from its 1929 peak. (Tabarrok, 1998).  The proponents of this Act cited conflict of interest amongst other things to support the need for the separation.  One counter argument put forward by Casserley, Härle and Macdonald (n.d) is that sophisticated global economy requires one-stop large banks where customers can be offered vast range of products and services.  It is concluded that though universal banking is highly beneficial, there is the need for strict regulation, constant and effective supervision in order to avoid conflict of interest, monopoly and possible failure of the banking system.

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