Diesel

10 NIVESHAK
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Universal Banking in India
Introduction
The financial crisis of 2008 could well be
epochal in the financial history of the world.
Like every crisis that has gripped the world,
it too threatened to derail the good work of
decades, but unlike your run of the mill crisis, it
exposed deep seated fault lines in the so called
sophisticated financial systems of the world.
The investment banking (IB) sector bore the
brunt of the crisis, it was after all one of the
biggest culprits. In the aftermath of the crisis,
the IB sector was in tatters. Some of the
biggest conglomerate banks in America had
failed spectacularly (ironically, they had been
bestowed the Too Big to Fail status). Standalone
IBs hadn’t fared any better.
Universal Banking
There are two pure forms of banking-commercial
and investment. A combination of these two,
in different proportions gives rise to Universal
Banking (UB). For the better part of the twentieth
century, universal banking was disallowed in
the USA due to the perceived conflict of interest
between commercial and investment banking
Sainath Zunjurwada
SIMSREE
arms of the group. However, the world embraced
UB underscoring the economies of scale and
scope so derived. In the US itself, the ban was
lifted in 1999. The USA accepted UB under the
Financial Holding Company (FHC) structure. The
Bank as the Holding Company (BHC) or parent
bank with non-banking subsidiaries model was
employed in countries like India.
UBs were dominant even in the pre-2008 era,
due to monopolistic competition. The standalone
banks were obliterated in the 2008 crisis and
only the universal banks now survive.
Addressing the risks
A flood of regulations came in, such as the
Volcker Rule in the US, Vickers Commission in
the UK and Liikanen report in Europe, aimed
at insulating the important, necessary banking
activities from the riskier, less important.
The Volcker rule was strict and narrow in focus.
It sought to ban proprietary trading by banks,
while distinguishing it from market making
activities on behalf of customers which were
allowed. It proscribes the coexistence of such
trading activities and banking in different
NOVEMBER 2014