Conventional approach envisages the role of a commercial bank as a money lender, which funds the loan with deposits. In the process, the bank transforms highly liquid deposits (presumably short term) into illiquid loans with long-term maturity. Thus the commercial bank performs a liquidity creation or asset transformation function. An investment bank, on the other hand, is a financial intermediary that performs primarily the brokerage function of bringing together buyers and sellers with complimentary needs. It thus reduces the search cost for market participants.
First, the discernible trend toward deregulation of commercial banks as a result of the demise of the Glass–Steagall Act has suffered a setback due to scandals and bankruptcies involving firms such as Enron and WorldCom. A striking case illustrating potential or de facto re-regulation is highlighted by a recent series of judgments against leading banks (such as Citigroup, Credit Suisse First Boston, Goldman Sachs, Morgan Stanley, Lehman Brothers, Deutsche Bank, and UBS) that have agreed to the “Chinese wall” separation between underwriting activities and research activities (typically affiliated with the brokerage function) in an investment bank.
Second, the phenomenon of mergers and acquisitions (M&A) between investment banks and commercial banks has led to the daunting task of integrating these banking activities – a task that has partially emanated from differing, if not incompatible, cultural orientation of these two branches of banking activities.
Finally, integration of these banking activities has been confined to a small, albeit significant, segment of the banking industry. The remainder of the firms in the industry, both commercial and investment banks, face the urgent task of defining their niche for survival and prosperity.
First, the discernible trend toward deregulation of commercial banks as a result of the demise of the Glass–Steagall Act has suffered a setback due to scandals and bankruptcies involving firms such as Enron and WorldCom. A striking case illustrating potential or de facto re-regulation is highlighted by a recent series of judgments against leading banks (such as Citigroup, Credit Suisse First Boston, Goldman Sachs, Morgan Stanley, Lehman Brothers, Deutsche Bank, and UBS) that have agreed to the “Chinese wall” separation between underwriting activities and research activities (typically affiliated with the brokerage function) in an investment bank.
Second, the phenomenon of mergers and acquisitions (M&A) between investment banks and commercial banks has led to the daunting task of integrating these banking activities – a task that has partially emanated from differing, if not incompatible, cultural orientation of these two branches of banking activities.
Finally, integration of these banking activities has been confined to a small, albeit significant, segment of the banking industry. The remainder of the firms in the industry, both commercial and investment banks, face the urgent task of defining their niche for survival and prosperity.