Separation of Investment Banking and Commercial Banking: Implication for Public Interest and Confidence

Abstract

The purpose of this paper is to critically examine existing literature on separation of commercial banking activities from investment banking activities in order to advise whether the commercial and investment banking activities should be combined or separated. Introduction of new regulation in the wake of global financial crisis bring with it additional operating cost to operators of the financial sectors. While supervising plethora of regulations by central banks becomes difficulty and in the end nothing is achieve from it. The paper identified the causes of the global financial crisis that commenced in the mid-2007 as a result of global financial imbalance; long period of low interest rates in the advanced economies; consumer failure to monitor for themselves; managers compensation schemes encouraged risk-taking; skewed incentives of the rating agencies and finally, the limitation of risk measurement and regulation. These reasons contributed to the global financial crises and not the repealed Glass-Steagall Act. The study concluded that the repealed of the Act did not cause the global financial crisis in 2007 but was rather due to inadequate supervision by the regulators. The study adopts content analysis to assess the risks associated with combining the two operations together and those who posit that the combination should be separated and those in favour of it. The study professed some recommendations that will protect public interest and private capital while carrying out combined operations of commercial banking and investment banking activities.

Keywords: commercial banking, investment banking, risk-taking, separation, financial crisis

JEL Classification: E58