Discuss the separation of commercial banking and investment banking, over time. Comment on how useful and...

Discuss the separation of commercial banking and investment banking, over time. Comment on how useful and appropriate this separation is today; should this separation be modified?

Expert Solution

Separation of commercial and investment banking

Commercial banking is a form of banking that accepts deposits from the customers and lends money to them through various types of loans such as vehicle loan, home loan and new venture loan, etc. Whereas investment banking does not accept deposits and lend money. Investment banks work as a middleman to the new companies and help them to raise money through the initial price offering (IPO) from the stock market. Investment banks usually earn a spread by selling the IPO. There is always a debate whether investment banking activities should be separated from the commercial banking. From 1933 to 1999 investment banks and commercial banks are not merged with each other. However, after that law permitted it to be merged with each other. Many believe that investment banking which involves in the stock market and speculations and futures a lot can make commercial banking to suffer losses. If something goes wrong with the bet made by the investment banking, then the bank can get into the liquidity crunch and can be failed. If both investment bank and commercial banks are together, then financial trouble in investment banking can put crisis into the commercial banking as well. So, both should be separated to avoid catastrophic losses.

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