Commercial and Investment Banking: Analysis of Separation or Unification

MIKE ADU-GYAMFI

Abstract


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.


Full Text:

PDF

References


Anenberg, S.A., Horn, C.M., & Hawken, K (2010). Basel III Capital Ratios and Transition Periods Set, but Key Questions Remain. Retrieved Retrieved April 16, 2013 from http://swissmc.blackboard.com/

Basel Committee (2009). Basel Committee improves market risk framework. Retrieved April 16, 2013 from http://swissmc.blackboard.com/

Benjamin, M., & Harper, C (2009). Volcker Urges Dividing Investment, Commercial Banks (Update1). Bloomberg. Retrieved September 16, 2013 from http://www.bloomberg.com/apps/news%3Fpid%3Dnewsarchive%26sid%3DatSsZ5Fp8x

Bolt, W., & Tieman, A. F. (2004). Banking Competition, Risk and Regulation. International Monetary Fund.

Borio, C. E., & Filosa, R. (1994). The Changing Borders of Banking: Trends and Implications. Basle: Bank for International Settlements.

Casserley, D., Harle P., & Macdonald, J. (n.d). The Historical Background to the Current

Debate: Should Commercial and Investment Banking be separated? Retrieved September 14, 2014 from http://www.mckinsey.com/App_Media/Reports/Financial_Services

Damjanovic, T., Damjanovic, V., & Nolan, C (2012). Universal Banking, Competition and Risk

in a Macro Model. University of Exeter, Economic Department Discussion Papers Series. Retrieved September 15, 2014 from http://business-school.exeter.ac.uk/documents/paper/economics/2012/1201.pdf

Filipiak, E (2009). The Creation of a Regulatory Framework: The Enactment of Glass-Steagall. APSA Toronto Meeting Paper. Retrieved November 21, 2013 from http://papers.ssrn.com.

Fohlin, C. (2000). Banking Industry Structure, Competition, and Performance: Does Universality matter? Pasadena: California Institute of Technology.

Iannotta, G. (2010). Investment Banking: A Guide to Underwriting and Advisory services. London: Springer. Retrieved September 18, 2013 from http://books.google.com

Jackson, W.D. (1987). Glass –Steagall Act: Commercial vs. Investment Banking. Congressional Research Service. Retrieved July 20, 2013 from http://swissmc.blackboard.com/

James, H., Lindgren, H., & Teihova, A. (Ed.). (1991). The Role of Banks in the Interwar Economy. New York, Cambridge University Press. Retrieved September 16, 2013 from http://books.google.com

Johnson, S., & James Kwak, J (2010) 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, Random House, p. 6.

Mayer, M (2009). Glass-Steagall in Our Future: How Straight, How Narrow. Networks Financial Institute, Indiana State University. Retrieved November 21, 2013 from http://papers.ssrn.com

Reed, E. W., Rose, P.S., & Woodland, D.L. (1976). Commercial Banking. New York: Prentice-Hall. Retrieved September 17, 2013 from http://books.google.com

Reserve Bank of New Zealand (2007). Capital adequacy ratios for banks - simplified explanation and example of calculation. Retrieved September 15, 2014 from

http://people.stern.nyu.edu/igiddy/articles/capital_adequacy_calculation.pdf

Richard S. Grossman, S. R. (2010). Unsettled Account: The Evolution of Banking in the

Industrialized World since 1800. Princetown University Press. Retrieved September 16,

from http://press.princeton.edu/titles/9219.html

Sheng, A (2009). From Asian to Global Crisis. NY: Cambridge University Press.

Stiroh, K.J (2002). Diversification in Banking. Is Noninterest Income the Answer? Retrieved September 17, 2013 from http://www.newyorkfed.org/research/staff_reports/sr154.pdf

Subramanyam, P. (2005). Investment Banking: An Odyssey in High Finance. New Delhi: Tata McGraw – Hill Publishing Comoany Limited. Retrieved September 18, 2013 from http://books.google.com

Sundararajan, V., Enock, C., Jose, A.S., Hilbers, P., Krueger, R., Moretti, M., & Slack, G (2002). Financial Soundness Indicators: Analytical Assets and Country Practise. Washington D.C: IMF Graphics Section. Retrieved September 18, 2013 from http://books.google.com

Tabaarok, A. (1998).The Separation of Commercial and Investment Banking: The Morgans vs. The Rockefellers. The Quarterly Journal of Austrian Economic, 1(1), 1-18. Retrieved June 2, 2013 from https://mises.org/journals/qjae/pdf/qjae1_1_1.pdf

Tebogo, B. (2012). Should the Services Provided by Commercial and Investments be Separated ? If so, Why?. Social Science Research Network. Retrieved September 16, 2013 from http://ssrn.com/abstract=2056461

Wilmarth, A.E., Jr (May, 2009). The Dark Side of Universal Banking: Financial Conglomerates and the Origins of the Subprime Financial Crisis. Connecticut Law Review, 41 (4), 964 – 1050. Retrieved July 10, 2013 from http://swissmc.blackboard.com/


Refbacks

  • There are currently no refbacks.


Copyright (c) 2016 MIKE ADU-GYAMFI



Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.