The New Case for Functional Separation in Wholesale Financial Services
This paper reexamines the separation of commercial and investmentbanking in the context of modern wholesale financial environment,dominated by a small cohort of “systemic” institutions. Thepaper traces the pathology of regulation and deregulation from thewatershed events of the 1930s to the systemic financial failures of therecent past. It then considers the structure, conduct and performance ofthe wholesale financial industry and how firms that cannot be allowed tocollapse get that way. Based on the industrial organization of globalwholesale finance, the paper then examines the available regulatorytechniques, and makes some judgments as to their relative promise inpromoting future financial stability with least possible dislocation offinancial efficiency, proposing benchmarks for the calibration ofproposals for regulatory reform. The paper then evaluates functionalseparation and carve-outs of high-risk activities that cannotdefensibly be conducted within systemic financial firms in the realworld of power politics and regulatory capture. The paper concludes thatblanket condemnation of the functional-separation features of the 1930sfinancial reforms is unwarranted in the light of ongoing experience, andthat it is time to revisit this issue in reconfiguring the globalwholesale financial architecture.
Year of publication: |
2010-01-21
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Authors: | Walter, Ingo |
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