Separation of Investment Banking from Commercial Banking – Evaluation
Financial crisis of 2008-2009
Regarding focusing on the past condition for the global financial crises it could be analyzed that the investment banking should be alienated or separated from commercial banking because under the repealed Glass-Steagall Act there can be the benefits. However, focused on the previous studies, the global financial crisis in 2007 were undertaken, as it was predicted that inadequate supervision by the regulators resulted in the crises, the study adopts content analysis in which investment banking and commercial baking have the risks associated. The two operations together can create the problems, thus need to be separated in order to protect public interest.
The private capital given support by the banks, however in large financial institutions there are the investment and commercial banks but associated with the high levels of risk. The preceding of the crash is there if they are not legally separated. Same holding company need to protect and save from the risks. Progressives argued that the investment banks should not be merge, if need to support the futher or the future activities, through focus and examine existing literature, it is known that separation of commercial banking and the investment banking activities is necessary (Tabarrok, 2014).
Glass Steagall Act of 1933
Glass-Steagall Act focus on the combined deposit and the investment banking those issuing higher quality securities can focus on the commercial and investment or other banking activities, so it is a big question that banking activities should be combined or separated. There is new regulation on the global financial crisis; there is additional operating cost of the financial sectors.
Moreover focused on the act, it could be known that regulations by central banks can result in the future crises and can causes of the global financial crisis, that take place in the in the mid-2007. Investment banking and commercial banking global resulted in the financial imbalance and low interest rates; however, there could be the consumer failure so the banks could suffer a lot, thus, the investment bank have the manager’s compensation schemes and commercial banking have own scheme. Therefore, staying focus on previous cases, the companies decided to encourage risk-taking through the limitation of risk measurement and regulation, which were by the country laws. Moreover, it is better to separate investment banking and commercial banking.
Public Interest Argument
Focusing on the public interest argument it is need to reorganized that the Federal Reserve is taking steps for the public-interest measure and design is made for the rectify persistent problems. The entire banking system can face the immediate banking crisis and thus, there could be struggle between rival elements so regarding focused on the public-choice analysis the banking industry need to focus on the separation of commercial and investment banking. Separated commercial and the investment banking can limit the issues and prohibited the interest on the payments (Valdez & Molyneux, 2010).