Walk down a shopping street in any German city. Likely as not, you will pass two or three bank branches with signs in the windows listing current share prices for widely held German stocks. It's nothing novel. The German public has always been accustomed to buying stocks and bonds through the banks. So has the Swiss public. The German and Swiss banks function much like U.S. retail brokerage houses in being active traders and retail distributors of securities in their respective countries.
Their example is worth looking at, because after 62 years, efforts are under way here at home to either repeal the Glass-Steagall Act altogether or modify it in some major way. The act has already been loosened somewhat, and the age-old argument that the banking, and securities businesses must be kept separate looks shakier than ever. Proposals have come from both sides of Congress and the Treasury Department for various kinds of changes. Apart from wish lists, what examples are there in the real world to look at and possibly adapt for use in the U.S.? The German and Swiss banks are one kind of model. The major banks in those two countries call themselves "universal banks," in that they combine commercial banking, investment banking, and brokerage, and function on all retail and wholesale levels for individuals and corporations. CS Holding, parent of Credit Suisse (Swiss Credit Bank, one of Switzerland's "Big Three" banks) and 63% owner of CS First Boston, enjoys the unique status of being an international powerhouse in both the banking and securities businesses. Deutsche Bank, Germany's largest bank, conducts large wholesale and retail securities businesses at home, several kinds of wholesale securities business abroad, and through its acquisition of the British merchant bank Morgan Grenfell, is enlarging its already considerable scope in international investment banking. Name almost any kind of banking or securities transaction, big or little, simple or complex, and the German and Swiss universal banks can perform it right in house.
For those concerned about anti-competitive effects, it's worth noting that smaller independent brokerage houses and investment banks flourish in these two countries alongside the universal banks. So do savings banks and private banks. Competition has not been stifled, either in the banks' home markets, or in international competition, going up against banks and securities houses based in other countries.
Carter Glass's misconception
If U.S. bankers had their druthers, would they want to go as far as the German and Swiss banks in integrating the banking and securities businesses, right down to the retail level? Some would; others might find it extreme. In the days before Glass-Steagall became law, there were U.S. banks like J.P. Morgan that dealt in banking and securities side by side. But the more common pattern from about the turn of the century up until 1933 was for banks to have separate investment subsidiaries or affiliates. That is the common pattern in much of Western Europe today.
Take Britain. U.S. banking grew up on British banking models. Sen. Carter Glass (D.-Va.), father of Glass-Steagall, believed that U.S. banks got in trouble during the Great Depression by straying from those models. His belief was that the business of banking had once been and should again become clearcut: take deposits from the public and use those deposits to finance short-term commerce. The securities business was purely and simply "gambling," as he put it, and banks should be kept well away from it.
Glass was mistaken on every count. First, the thousands of bank failures during the 1929-33 period were almost all among small rural banks with little or no securities business. There was no way to link the avalanche of bank failures at the time to speculative excesses in securities transactions, and the congressional hearings of 1932-33 that led to Glass-Steagall never succeeded in doing so. …