Reuniting Investment and Commercial Banking

Abstract

To compete with securities firms that now offer a full range of depository services, banks have sought loopholes in the Glass-Steagall Act, which separates commercial from investment banking. However, until the Act actually is repealed, banks will continue to face important limitations. Relaxing the Glass-Steagall restrictions would help bring investment banking profits and salaries into line, would benefit corporate customers of advisory services now given mostly by investment banks, and would halt the outflow from the US of financial services jobs and income. Policy alternatives for removing Glass-Steagall include: 1. a continuation of the current piecemeal erosion caused by the gradual widening of exceptions to the Act by the Federal Reserve states liberalizing the authorities of their state-chartered banks, and financial deregulations abroad, and 2. instigating a new policy to confine activities to accepting deposits and investing proceeds in safe, liquid securities in exchange for broader powers.