4IpaUJbnm

Advantages and drawbacks of commercial and investment banking separation
Insights and recommendations provided by aforementioned reports became widely discussed
both by supporters and opponents of the separation between commercial and investment
banking. Representatives of both groups used arguments supporting not only different
perception of economic processes but also economic interests of different parties of the
discussion. It became apparent, that predominant voice in the debate belongs directly or
indirectly to banks' representatives, trying to maintain current status quo. However, revision of
current state became unquestionable requirement nowadays. Toxic situation, when banks
became sovereign over the public interest is no longer socially accepted. Restoring proper
balance in the relation between banks and the rest of society is a fundamental condition for
rebuilding confidence. Regaining public interest sovereignty over banks should aim to:
reduce the probability of bank failure,
reduce the likelihood of government intervention,
reduce the cost of government intervention.
Accomplishing aforementioned tasks is not that easy. Separation of commercial and investment
activities seems to be a critical and inevitable but not satisfactory component of any actions
undertaken. It is also necessary to put an end to too-big-to-fail paradigm. Giving up this
condition would make the other actions not purposeful and ineffective. Discussion of pros and
cons for separation can be then decomposed into three key questions: (i) what exactly should
be separated? (ii) How should it be separated? (iii) Would the separation end up with TBTF?
[Lindo 2013]
What exactly should be separated?
What creates the banks’ special significance for the economy is their participation in the
creation of money. Taking deposits, lending and carrying money settlements are therefore key
to banking operations. They are the responsibility not only to the banks, but primarily to the
state implementing monetary policy. These activities must therefore be carried out without
interruption, in a continuous and safe manner. Governments are obliged to rescue these
activities even in case of a bank failure. Banks can also perform other activities, but they don’t
need to be provided continuously (e.g. securities underwriting) and the failure of one bank
wouldn’t interrupt the activity for the whole system. Bank reforms should therefore separate
those activities that must be continued (and therefore must be rescued) from those that can be
interrupted.
Separating banking business alongside the line of “impossible interruption” criteria should
enable gaining a few key targets. The first of them is reduction of potential costs to the
taxpayers. For universal banks, the cost of high-risk investment activities must be incurred in
order to save commercial activities. This process is often accompanied by the infamous idea
“privatization of profits and socialization of costs” *McGinn 2013+, which is increasingly
unacceptable to the public.
Opponents of separation often argue, that since Glass-Steagall until recent years there hadn’t
been great difficulties with universal banking model as such. This argumentation does not
recognize the new environment for banking activity. In the days of “incomplete markets”
[Blundell-Wignall 2011], the universal bank was much less dangerous. Relation between fair
value (mark-to-market) and amortized cost accounting (traditional banking products) was clear
299