Separation of Commercial Banks and Investment Banks Essay

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One of the key concerns growing out of the debate on whether to separate or merge retail banking and wholesale/investment banking activities has been the stability of a nation’s banking system. The experience of the US banking system has suggested that merge of commercial and investment banks is a better approach to achieving stability. After the global financial crisis, the American economy went into recession. The policy priority of American government was then to intervene into its banking system so as to mitigate the impact of the crisis. One advantage of the merger of banks is that it can improve the overall condition of the economy (Khan, 2012). The merger of banks unites small and weak unit banks which will then be able to provide …show more content…
However, proponents of the Glass-Steagall Act have maintained that the merger of banks could generate two critical problems – “conflict of interests” and “too big to fail” – which, in their view, were responsible for the Great Depression in 1930s and the financial crisis in 2007 (Casserley, Härle, and Macdonald, 2011). In our opinion, the fact that the Glass-Steagall Act was repealed in 1980 indicates that the need for statutory permission of the merger of banks in the US had prevailed over concerns about the problems associated with the merger of banks. This further suggests that since the Glass-Steagall Act had failed to address the underlying cause of the Great Depression which was the fragility of small financial institutions, the repeal of the Act and permission of bank merger seemed to have been considered to be the way toward the establishment of a healthy and strong financial system in the US. Therefore, despite these problems that might arise from the merger of banks, the permission of bank merger has been regarded as a better approach to achieving financial system stability than the statutory requirement of separation of banks.

Thirdly, another argument for separation concerns the moral hazard issue that may arise from universal banks. According to this argument, the merger of banks may be likely to create incentives for banks to make