Separation of Investment and Commercial Bank Services is Unlikely to Reduce Systemic Risk
Swiss Management Center University (SMC)
June 22, 2012
The banking crisis that originated in 2007 led to renewed calls for the separation of commercial and investment banking services. The regulation and supervision of financial markets (in particular financial intermediaries) are in public interest, but the cost of regulation and supervision should not exceed the benefits. Revisiting the lessons learned from the reforms that were introduced with the passage of the Glass-Steagall Act leads to the conclusion that the introduction of barriers between commercial and investment banking services as a measure to manage systemic risk was ineffective. An analysis of the current arguments in favor of, and against a forced separation of commercial and investment banking services, and the possible unintended consequences that may result from of such a separation, indicates that the current market reforms are misguided. The enforcement of the separation of commercial and investment banking services is unlikely to prevent the failure of financial intermediaries resulting in systemic crises.
Number of Pages in PDF File: 16
Keywords: bank regulation, commercial banking, investment banking, financial crisis, systemic risk
JEL Classification: G20, G21, G28working papers series
Date posted: July 17, 2012
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