One can argue that universal banks are not required because they are considered ‘Too Big To Fail’ (TBTF) (Wheelock, 2012). A bank is TBTF if its failure can lead to a major credit freeze in the financial industry and as the bank is too huge and connected to other banking institutions, its downfall can cause a market contagion and automatically affect the entire banking (Reinholdson and Olsson, 2012).The downfall of Lehman Brothers lead to contagious shockwaves throughout the global financial system proving the TBTF doctrine (Wienandt and Moenninghoff, 2011). This issue also creates a moral hazard problem (Reinholdson and Olsson, 2012). In U.S even if a Universal bank’s balance sheet is weak due to losses, the government would bail them out as...
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... is dominated by the negative adverse effects of conflicts of interest and thus this banking has an overall negative effect of the client company’s growth.
The arguments provided above show how banks are increasingly becoming too big to fail and the issue of conflict of interest is also rising within the financial system. Thus, eliminating universal banks would most certainly at least limit these problems which will result in decline of excessive risk taking activities as well as moral hazard problems. As mentioned, the failure of these banks could affect the entire banking system as well as create a negative impact on the entire economy. Thus, the arguments stated and backed by academic literature proves to some extent as to why universal banks are not required in today’s world and there should be a separation between commercial and investment banking activities.
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