By doing so, it recognized the fundamental reality that investment and commercial banking are very different from one another.
Commercial banking is an inherently stable business. Consumers need to have commercial banks that are reliable in terms of holding savings and borrowing to buy property. Small business relies on these banks as well, for loans and start up financing. When commercial banks are stable, this creates an atmosphere of confidence in the economy. The reality is that when they are unstable, people are more hesitant to deposit money, if they think that there is a chance they could lose that money. With no deposits, banks cannot lend, and that means no mortgages, car loans, or small business loans, and that would be incredibly detrimental to the economy. One of the key objectives of Glass-Steagall was to ensure that there would be stability in the economy via stability in the commercial banking system.
Investment banks, of course, have an entirely different business model. They take companies public, and work on mergers and acquisitions. As such, investment banks not only work on bigger deals, but they take on inherently more risk in their businesses. Over time, investment banks have become incredibly creative when it comes to structuring deals and investment products alike, something that the repeal of Glass-Steagall didn\'t take into account. While there were still limitations, sometimes fairly strict, on the activities of investment banks, they are clearly more volatile by the nature of their work, relying on large deals rather than a large amount of smaller deals. Commercial banks are inherently better diversified than investment banks. The high degree of both volatility and complexity in investment banking makes it a poor match for commercial banking.
The article that was written by Conley (2011) discusses the impact that collateralized debt obligations (CDO's) would have upon the subprime loans. These were created in 1987, by the Wall Street firm Drexel Burnham. In this product, the investment bankers would take a number of different articles and combine them together as one investment. The various assets that were used included: junk bonds, mortgages and other high yielding investments from
While many banks are closing branches, that is not necessarily the best strategy for banks attempting to stay close to their customers. Transaction costs: Of course all banks want to reduce transactions costs, but how many look at their customer's cost/value trade-offs. A win-win may be online banking at Wells Fargo, or a tie-up with Quicken and Microsoft Money, assuming the customers in focus are computer-savvy and are happy with