Commercial Lending and the Separation of Banking and Commerce

33 Pages Posted: 17 Jul 2007  

Adam Feibelman

Tulane University - Law School


Modern scholarship on corporate law treats equity-holders, managers and/or directors as the primary levers of corporate governance. In recent years, however, economists and legal scholars have increasingly recognized that creditors often engage in governance as well. Creditors engage in governance directly, for example, when they exercise contractual rights that give them some degree of control over the operations of their corporate debtors. They can also engage in governance indirectly, as when they monitor borrowers and signal important information to other stakeholders. Among creditors, banks are particularly active in providing these forms of corporate governance. The fact that banks exercise such governance of their corporate borrowers is puzzling in light of an important, enduring principle of American banking law and regulation - the separation of banking and commerce. Despite recent reforms that supposedly tear down the wall between banking and commerce, banks still generally cannot become owners of corporate firms. Yet banks' lending activities often share many of the financial and functional attributes of formal ownership. And most of the rationales given for the policy of separation of banking and commerce - e.g., concerns about potential conflicts of interest, expansion of subsidies, and accumulation of market power - seemingly apply to banks in their capacity as corporate lenders. This in turn suggests that banks' relationships with their corporate debtors may provide evidence that would help evaluate the potential costs and benefits of allowing banks to invest more broadly in the equity of commercial firms. In fact, available data suggest that banks' governance is often valuable to their corporate borrowers. If so, this may reflect that at least some of the rationales for separating banking and commerce are unfounded or overstated.

Keywords: banks, banking, creditor governance, bank governance, banking and commerce, corporate governance

JEL Classification: G20, G21, G28, G30, G32, G34, K10, K12

Suggested Citation

Feibelman, Adam, Commercial Lending and the Separation of Banking and Commerce. University of Cincinnati Law Review, Vol. 75, No. 3, 2007; UNC Legal Studies Research Paper No. 1000284. Available at SSRN:

Adam Feibelman (Contact Author)

Tulane University - Law School ( email )

6329 Freret Street
New Orleans, LA 70118
United States

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