A distinctive and much debated feature of the US banking and financial system is the separation of commercial banking and investment banking which is legislated by the Glass-Steagall Act of 1933. Before 1933, commercial banks and their securities affiliates competed directly with investment banks in the business of underwriting and originating securities. The purpose of this project is to analyze and evaluate the arguments for and against universal banking by examining the investment banking activities of commercial banks prior to the Glass-Steagall Act. Information will be collected from a variety of financial publications from the 1920s and 1930s. These data will allow the comparison of underwriting activities and performance of commercial banks and independent investment banks. The project will explore the empirical relevance of arguments made in the 1930s and today against universal banking--e.g., potential conflicts of interest when lending and underwriting are permitted under one roof, ability to take advantage of unsophisticated depositors, and monopolistic control of access to capital markets for small and medium sized firms. The arguments for universal banking include potential economies of scope in information gathering and processing. In addition, the effect of commercial banks' internal organizational structure on the performance of their investment banking activities will also be investigated. This project is particularly timely and important given the great interest in banking reform.
