Universal Banking

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UNIVERSAL BANKING 

What is Universal Banking? 
“Banking that includes not only services related to savings and loans but also investments.” This is most common in European countries as it is prohibited by law in the United States. Although, in recent times there has been much market pressure in the US for change.  In universal banking, large banks operate extensive networks of branches, provide many different services, hold several claims on firms (including equity and debt), and participate directly in the corporate governance of firms that rely on the banks for funding or as insurance underwriters.  In our discussion about Universal Banking, we would address the following questions;  • Would universal banking be effective in a newly industrializing economy?  • Does universal banking reduce corporate financing costs for a newly industrializing economy?  • What does it mean to India? Is it a viable option for the ‘Oh so tempestuous’ Indian Economy? 

Universal Banking and the Financing of Industrial Development  In a Paper submitted to the World Bank, Calomiris contrasts the cost of financing industrialization in the United States and in Germany during the second industrial revolution. Between 1870 and 1913, large production and distribution activities brought a new challenge to financial markets: the rapid financing of very large, minimally efficient industries. Large production is typical of modern industrial practice, so the lessons from that period apply broadly to contemporary developing countries.  The second industrial revolution involved many new products and technologies, especially involving machinery, electricity, and chemicals. The novelty of these production processes posed severe information problems for external sources of finance. Firms were producing new goods in new ways on an unprecedented scale. Firms needed quick access to heavy financing from sources whose information and control costs were greater because of the difficulty of evaluating proposed projects and controlling the use of funds.  Finance costs for industry were lower in Germany than in the United States, because U.S. regulations prevented the universal banking from which Germany benefited. High finance costs retarded U.S. realization of its full industrial potential and influenced U.S. firms inefficiently to rely more on raw materials and labor rather than on hard-to-finance equipment (fixed capital). Industrial buildings and equipment are less desirable than materials and accounts receivable for a financially constrained firm, because they are less liquid. The potential to expand quickly and reap economies of scale was greater in German industrialization. The cost of industrial financing began to decline when institutional changes came about that increased the concentration of financial market transactions. In recent decades, a combination of macroeconomic distress, international competitive pressure, and the creative invention of new financial intermediaries has helped the U.S. financial system overcome the regulatory mandate of financial fragmentation. 

Universal Banking – An Understanding 
Universal banking is a combination of commercial banking, investment banking and various other activities, including insurance. It seeks to provide the entire gamut of financial products under one roof and reflects the global convergence between commercial banks, investment banking and insurance companies. The convergence is an attempt by banks to fulfill the lifelong needs of the customer by following the cradle-to-grave concept. Commercial banks have a long-term relationship with their customers when compared to other financial intermediaries.  Universal banking has its own merits and demerits. The main advantage is that it results in economy efficiency, lower cost and higher output. But there is a fear that because of their sheer size they might gain a monopoly, which is undesirable for the economy. Also there can be conflict of interest...
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