The New Case for Functional Separation in Wholesale Financial Services

38 Pages Posted: 1 Aug 2009

See all articles by Ingo Walter

Ingo Walter

New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: July 31, 2009

Abstract

This paper reexamines the separation of commercial and investment banking in the context of modern wholesale financial environment, dominated by a small cohort of “systemic” institutions. The paper traces the pathology of regulation and deregulation from the watershed events of the 1930s to the systemic financial failures of the recent past. It then considers the structure, conduct and performance of the wholesale financial industry and how firms that cannot be allowed to collapse get that way. Based on the industrial organization of global wholesale finance, the paper then examines the available regulatory techniques, and makes some judgments as to their relative promise in promoting future financial stability with least possible dislocation of financial efficiency, proposing benchmarks for the calibration of proposals for regulatory reform. The paper then evaluates functional separation and carve-outs of high-risk activities that cannot defensibly be conducted within systemic financial firms in the real world of power politics and regulatory capture. The paper concludes that blanket condemnation of the functional-separation features of the 1930s financial reforms is unwarranted in the light of history or recent experience, and that virtually all defensible reform options are likely to lead to favor financial specialists at the expense of financial conglomerates.

Keywords: Financial regulation, Financial crisis, Glass-Steagall Act, Financial conglomerates, Universal banking, Financial sector reform, Financial architecture, Financial stability

JEL Classification: G20, G32, G34, G38, L13

Suggested Citation

Walter, Ingo, The New Case for Functional Separation in Wholesale Financial Services (July 31, 2009). Available at SSRN: https://ssrn.com/abstract=1442148 or http://dx.doi.org/10.2139/ssrn.1442148

Ingo Walter (Contact Author)

New York University - Leonard N. Stern School of Business ( email )

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New York University (NYU) - Department of Finance

Stern School of Business
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