Size Matters: Commercial Banks and the Capital Markets

Abstract

For decades, the Glass-Steagall Act 1 erected a wall between commercial and investment banks, 2 largely by restricting a commercial bank's (or its affiliate's) ability to underwrite, trade, and sell securities. 3 The separation was intended as a shield: To protect commercial banks and their depositors against risks that would arise if a bank or bank affiliate began to do business in the capital markets. 4 It was no surprise, then, that when the Gramm-Leach-Bliley 1 Banking Act of 1933, Pub.L. No. 73-66, 48 Stat.162 (codified as amended in scattered sections of 12, 15 and 39 U.S.C.).2 This Article's focus is on the relationship between investment banks and the largest commercial banks.References to "banks" or "commercial banks" are to the largest U.S. deposit-taking institutions, including the U.S. operations of non-U.S.institutions.References to "investment banks" are to broker-dealers whose core business has traditionally been securities underwriting, securities trading (as principal and for customers), investment advice, and strategic (mergers and acquisitions) advice.3