Arguing that the benefits outweigh the risks, a study by a prominent international banking organization encourages U.S. banks to step into the securities business.
Commercial banks take on few extra liabilities by engaging in underwriting and other capital markets activities, provided they have the appropriate organization and are adequately capitalized, according to the study by the Basel, Switzerland-based Bank for International Settlements.
"Considering the potential gains from combining traditional commercial banking with securities activities," the study stated, "it would seem desirable to allow commercial banks to enter the securities business."
The study, titled "Commercial Banks in the Securities Business," responds to the current debate in the United States over whether Congress should let commercial banks engage in securities-related activities.
The Bank for International Settlements, or BIS, acts as a global clearing institution for central banks. Working papers sponsored by the bank do not reflect BIS' own position but are considered authoritative views on issues of topical interest.
Presenting its arguments, the study noted that traditional lending tends to be more costly for corporate customers. As a result, corporations are increasingly raising funds in capital markets, giving so-called "universal" banks with securities underwriting powers advantages over other banks.
"By offering a broader set of financial products than a specialized bank, a universal bank can develop wider and longer-term relationships with firms," the study stated.
Universal banks can spread their costs over a broader base of activities and generate more revenues by offering a "bundle" of products. Risk is also reduced by diversifying activities.
The report nonetheless noted several dangers inherent in allowing universal banking. One is the inclination of banks to promote securities they underwrite.
A bank, for example, "may promote the securities it underwrites even when better investments are available in the market" and might "dump into trust accounts it manages the unsold part of the securities it underwrites," the report observed.
Other dangers: A bank might pressure a corporation into using its underwriting services by threatening to cut off credit facilities. A bank might also force a borrower in financial difficulties to issue risky securities in order to pay off loans or might abuse confidential information supplied by a company issuing securities.
However, market forces, such as banks' concern for their reputations and expectations by investors, are likely to counteract such dangers, the report said.