The separation of commercial and investment banking: A literature review

Abstract

The purpose of this thesis is to survey the academic literature concerning the separation of commercial and investment banking, and to serve as a basis for future research. We provide a review of 75 papers showing that there is no unanimous evidence either for or against the argument that a separation of commercial and investment banking would be more beneficial for society overall. We further demonstrate that the recent financial crisis did not directly stem from the combination of commercial and investment banking activities within universal banks. The findings do, however, provide evidence showing that increased diversification within the financial industry has amplified the systematic risk exposure for banks and increased the similarity between institutions. Our results suggest that regulators should focus on limiting the interconnectedness and similarity between financial institutions, thereby minimizing the risk of systemic crises and market contagion. Even though this literature review does not determine whether or not commercial and investment banking activities should be unified, we hope that it can act as an aid to future research in the area.