Separation of Commercial Banks and Investment Banks

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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 diverse services and with time, to reduce costs and gain competitiveness and efficiency. As will be argued below, contrary to the view that the merge of banks was responsible for the financial crisis in 2008 and Great Depression in 1930s, universal banks constitute one of the key solutions to the underlying cause of the financial turmoil in history.

First of all, in 1930s, the Great Depression in America triggered considerable debates on the primary cause of the stock market crash. Analysts in favour of separation of banks have observed that the fundamental reason was the “overproduction of securities” resulted from the combination of commercial and investment banks (Casserley, Härle, and Macdonald, 2011). Until 1902s, national banks had no authority to issue securities. However, “the Civil War had been an explosion of new securities issued to finance railroads leading to the western Unit States and the expansion in public fields” (Hendrickson, 2012). Many state-chartered banks captured this chance and were involved in securities underwriting. Historical data has shown that compared to a number of merely 205 banks engaging in securities underwriting in 1922, there were approximately 5 times more national banks that were...
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