Universal Banking in the United States: What Could We Gain? What Could We Lose?

By Anthony Saunders; Ingo Walter | Go to book overview

system as much as possible to the economic realities. Observers in Europe and Japan occasionally remark that the United States has managed to create a system that is inefficient, unstable, and uncompetitive -- all at the same time. To many, U.S. "financial reform" has become an oxymoron.

Of the various dimensions of the financial regulatory structure in the United States, as elsewhere, none is more controversial than activity limits -- restrictions on the kinds of businesses financial institutions can undertake, and how they can undertake them. The United States had few such limits in place during its period of most rapid growth and industrialization in the late nineteenth and early twentieth century, with broadgauge financial institutions heavily involved in banking, commerce, and industry. Such limits have prevented banks, in the interest of stability, from engaging in commerce and industry (and vice versa) no matter how closely these activities were associated with the competitive viability and comparative advantages of the players. No other major industrial countries, except perhaps Japan, have such limits -- although all have regulations as to how multifunctional financial activities may occur -- and even Japan avoids some of the regulatory constraints through industrial and financial crossholdings, and is systematically relaxing the activity limits that do remain in force in a deregulatory process no less heavily politicized than the United States.


Activity Limits and the National Interest

In the pervasive economic restructuring that goes on in response to changing consumer and industrial demand patterns, capital and other resource costs, international competition, and perceived economies of scale and scope, individual business firms in search of maximum shareholder value constantly reassess the activity span of their strategies. Vertical integration to secure sources of supply or downstream distribution may serve this propose, for instance. Hotizontal expansion to acquire market share, complementary product lines, or risk spreading may be attempted for the same reason, sometimes successfully, sometimes not.

When management appears to be on the wrong track, the financial markets provide appropriate signals leading to further corporate restructuring or retrenchment. When the firm's objectives collide with the overriding public interest in keeping markets functioning efficiently or in achieving various noneconomic objectives -- even at some cost to the economy -- external constraints are imposed in the form of antitrust, environmental, employment, consumer protection, or other types of legislation, along with appropriate enforcement measures. These constraints involve a delicate balancing act to insure that the social benefits of regulation justify their costs, which come in the form of less efficient use of resources and possibly slower growth. Within the bounds of such constraints, industrial restructuring and shifting forms of business organization in market

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