Investment banking should be separate from retail banking activities. This is the judgment of a European Union advisory group as Europe tries to develop a unified banking oversight entity.
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The group says proprietary trading and other activities closely linked to securities and derivatives markets along with property lending should be separate activities that require banks to boost capital reserves.
The group also recommends that bondholders should be required to take losses in the case of a bank collapse or bailout and that such bonds should be given to bankers as part of their bonuses.
These recommendations would allow the retail banking side to continue to function even if the investment banking side gets shut down.
But new regulation will be difficult to impose. The notion of a unified banking system is not a favorite with non-Eurozone banks. They do not want to lose control and fear favoritism within the new system.
are reminiscent of the Glass-Steagall Act, the law that separated commercial banking activities from retail activities after the Great Depression.
The Act was repealed in 1999 by the Gramm-Leach-Bliley Act, which did away with the restrictions and began the consolidation movement with banks buying investment entities.
There has been an ongoing debate about whether Glass-Steagall should be reinstated in some form as a result of the 2008 financial crisis and incidents like the JPMorgan derivatives trading blowup.