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public trust institution. The other doubt is, whether prudential regulations, safety net with
deposit guarantee system could cope with that combination of activities?
Distinction of aforementioned types of banks can’t ignore of regional traditions or appropriate
jurisdictions. In many legal frameworks commercial and investment banking have been legally
separated. For the others the combination of the both is allowed. The approach to this problem
has been changing over the years. The most purposeful is to trace the processes that took place
in the US, Germany and the UK.
Historical co-existence of commercial and investment banking
The case of United States
American history of banking is the most spectacular view of opposing forces and ideas
participating in the discussion on separation between commercial and investment banks. With
the beginning of the XX century, America had a workable banking system with one national
currency but still without central bank. Exposed to continuous tensions, both financial and
political, economy struggled with the “crisis of the big banks”. The big banks, with J. Morgan at
the forefront, grew in power and were playing a central role in the consolidation of American
business into giant trusts. In 1913 Senate Committee recommended that banks should be
confined to commercial banking, but it did not lead to splitting them u However, it led to the
establishment of the Federal Reserve System in 1913. During the boom years of the 1920s, it
seemed that the era of universal banking had arrived and is going to last for long. However the
financial crisis of the early 1930s put the process into reverse. Public anger was inevitably
directed at bankers. During the national debate economists asked why the Wall Street Crash of
1929 came into the worst depression in modern history. Some of them blamed small local
banks, defaulting massively. Similar views were held by the advocates of the large banks. On
the other hand, the advocates of the small banks argued, that they were not the cause of the
problem, but its victims. They maintained that large, federal banks, involved in securities
activities, should be blamed for blowing up the stock-market bubble and setting off the crisis.
Amidst animated discussions, in 1933, Carter Glass together with Henry Steagall introduced a
Glass–Steagall Act. It forced banks to close down or spin off their securities businesses and
established the Federal Deposit Insurance Corporation (FDIC) [Bulkley, 1932]. Banks had to
choose whether they wished to accept deposits or deal in securities (they could no longer do
both). From 1933 to the late 1970s, the Glass–Steagall Act remained largely unchallenged. In
1980s banks started to push for its repeal. Profits from traditional lending of commercial banks
started to decline as creditworthy corporations funded themselves in the commercial paper
market. Meanwhile the investment banks, expanding their range of services, desired cheaper
funding sources. Access to investment banking activities provided commercial banks with new,
non-interest income as an alternative to seeking capital-intensive interest income from
commercial business. In 1988 the first crack in Glass-Steagall appeared. Eventually in 1999 the
Clinton administration in the USA legalized universal banks. Gramm-Leach-Bliley-Act repealed
key provisions of the Glass-Steagall Act. Domination of investment banking came to the end.
After the recent global financial crisis, however, financial regulation has become prominent
once again. The Frank-Dodd-Act implemented the Volcker Rule in 2010.
The case of Germany
In Germany universal banking has grown up organically and seldom been challenged. From the
beginning of 19 th century German private banks were helping to finance business start-ups
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