Thursday, July 30, 2015

FIN 260 Commercial and Investment Banking Systems. Should They be United or Separated?

The questions whether the commercial and investment banking systems should be united or separated and the advantages or disadvantages both case scenarios could cause have been analyzed for years. So was it really a good idea to repeal the provisions that separated the two banking systems?

Back in the days when there was no central banking system, the big banks were actually running the corporate America by helping American businesses become trusts. Those trusts were designed in a way that eliminated any competition and thus became monopolies. Therefore, Congress knew that something had to be done to improve the situation. In addition to the Anti-Trust laws that were passed something else had to dramatically change – banking system. It was believed at the time that the bankers were in too much control over the US economy, and too much power was a dangerous thing. The separation of the systems, however, did not occur until 1930s when the country was trying to eliminate future crises after the Great Depression. Nobody could tell 100% what really caused the crisis, but certain reforms that were deemed necessary at the time were enacted.
Certain notions reasoned the “Glass-Steagall” Act. The fact that the universal systems allowed the banks too issue many securities led to the crash of the stock market. The second reason was that banks had unstable securities in possession and it weakened the trust in the banking system in general. Thirdly, those banks sold those securities to the customers, which caused conflict of interest. Lastly, it was proved that the heads of the two largest banks were involved in insider trading, and tax avoidance.  All of the above helped to pass the Act. But in the 1980s when the commercial banking business was on the downside from the traditional way of lending and the investment banking did not see much of profit, the Act was challenged. Certain analysis was conducted, which indicated that the major reason behind the Great Depression was not the fact the banks were united but the operation of the single branch banks, which were weak and could not handle the pressure.
Now after considering everything, my personal opinion about the fact that the commercial and investment banking systems could operate jointly is somewhat skeptical. On the one hand, I could see how many people, who oppose universal banking systems, see that one of the issues that could be involved is an ethical one. The joint system allows these banks to fund themselves at cheaper rates, which is somewhat unfair. Also these banks could use these deposits to invest in risky securities because government gives them guarantee. For example, if the government will most likely bail out the bank from a risky investment failure, then why not take that step anyway? Those “too big to fail” banks are actually enjoying this perk from the government. But where is the proof that if such bank fails, it would have a ripple effect and threat the whole financial system? Whatever the case might be, the government has to come up with certain regulations to lower the risks these banks are taking because such risks threaten the overall financial stability and is a very costly activity. Another thought against these two systems working under one roof is the fact that the overall bank image could be ruined if a certain security drops in value. Back in the days banks hid their interest in the transactions and could sell securities that dropped in value significantly. If something like that happens now, the general trust in banks could again weaken.
On the other hand, we live in the 21st century, where all businesses have to provide the best services to their customers to keep them satisfied and happy. Therefore, it is important for banks to provide a wide range of services to stay competitive and make profits. This in turn should facilitate economic growth because everyone is able to do business. Plus, if the banks have their interest in certain organizations that they fund, they will try to help them succeed by eliminating or lowering the conflict of interest to the minimum. With the rise of the securities markets, commercial banks would most likely lose a lot of money because companies could simply fund themselves through successful investments and avoid taking traditional funding. So having both systems together can also save commercial side of business.
All things considered, I see both advantages and disadvantages if the banking systems were separate or together. However, I believe at this point we need a universal system that could provide various services to its customers under one roof. This creates a favorable atmosphere for the bank and its customers. In addition, all banks and especially the “too big to fail” ones have to be more regulated in order to avoid risky financial situations. The drastic reorganization of the banking system right now could only harm the existing structure. A lot of companies can lose a lot of money, which in turn could lead to downsizing or bankruptcy, which in turn will raise unemployment rates. So I say leave the system as is, just add more regulations.

Please Note! All of the work posted in my blog is my personal insight into problem solving and answering questions. It is subjective opinions based on scholarly readings. The information may have some errors. I am not a professor.

If you see something you would like to contribute to or correct, you are more than welcome to comment below. I would appreciate it!

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