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Commercial Banks Are Now Allowed To Do More Investment Banking

News

Commercial Banks will be allowed to conduct financial activities that were previously off-limits under a new rule approved by federal regulators on November 20. Applications from banks to enter into new territory will be decided on a case-by-case basis and will be put out for public comment before a decision is made.

Implications

Commercial banks will now be allowed to establish subsidiaries to market new products and services, including securities and insurance, as long as the subsidiaries' capital and operations are separate from the banks'. Currently, commercial banks must create separate and cumbersome bank holding companies to operate many new divisions.

The separation of commercial and investment banking activities are due to the Glass-Steagall Act. The Act came into effect in the Depression era and was aimed at protecting financial institutions that take customer deposits from the risks associated with securities activities.

 The LA Times indicated that Treasury Secretary Robert Rubin supported the action. He was quoted as saying that the action would allow ‘banks to diversify their financial service activities, which will reduce risk and strengthen the banking system over the long term.’

Opposition

Insurance and investment banking groups opposed the rule, saying "it would give commercial banks access to their businesses without opening banking to their industries," according to the LA Times.