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Separation of Commercial Banks and Investment Banks Dwindling

 News

On October 30, 1996, the Federal Reserve (Fed) voted to knock down some of the barriers that separate commercial banks from securities affiliates, allowing them greater freedom to market and develop investment products.

The Fed voted to remove restrictions on commercial banks' marketing of brokerage services, and allow loan officers and investment bankers to work together.

The new rules would also allow commercial banks and savings institutions (S&Ls) to buy and sell more securities underwritten by their affiliates.

A total of 39 commercial banks operate securities divisions, known as Section 20 companies, including BankAmerica, Chase Manhattan, Nationsbank , and PNC Bank.

The separation of these two financial services functions were initiated in the aftermath of the 1929 depression, whereby J.P. Morgan’s role as a provider of both types of financial services, was blamed as a major contributor to the depression.

Implications
The banking industry is looking to the more important proposal that would allow commercial bank securities affiliates to generate 25 percent of their revenue from underwriting and dealing in securities, up from the current cap of 10 percent. The increase would make it easier for commercial banks to expand into higher-margin businesses like trading and underwriting of stocks and other financial assets.

Obviously, this would increase competition in underwriting and trading of securities.