The universal bank might not be that great after all.

That's the conclusion of several economists attending the Federal Reserve Bank of Chicago's bank structure conference last week.

Robert S. Chirinko of Emory University and Julie Ann Elston of Stanford University presented a paper critical of universal banks in Germany, whose model many observers want the United States to copy.

Universal banks are permitted to own securities firms, insurers, and other corporations outright. They do not require a bank holding company.

Eugene Ludwig, the comptroller of the currency, has pushed for adoption of a limited universal bank in the United States, proposing that banks be allowed to own securities operations directly. His proposal, which has attracted enormous opposition on Capitol Hill, is on hold.

The researchers, in the first work of its kind, studied the balance sheets of German universal banks and the affiliated securities, insurance, and other firms the banks operated.

They found these affiliated firms were not any more profitable than independent firms. In fact, some evidence showed that these bank affiliates actually earned less than independent firms.

They also reported that these captive firms usually paid higher interest rates than their independent peers, even though they were borrowing from their parent banks. "Our analysis of the pattern of bank debt suggests that broadening the scope of bank activities will not reduce the cost of external finance," they wrote.

Kurt Hunter, director of research for the Chicago Fed, said the paper should cause bankers to rethink support for the universal bank. "The so- called advantages of the German experiment may not be there," he said. "Things are not as great as they appear."

Randall S. Kroszner, an associate professor of business economics at the University of Chicago, said the evidence isn't surprising. U.S. bankers - back in the 1920s when they could own securities firms - recognized the problems associated with direct bank ownership, he said.

The public feared the bank's securities arm tried to sell a specific company's bonds in order to repay a risky loan to the bank. So, the public demanded higher yields on the securities. That drove down profits, said Mr. Kroszner, who wrote an academic paper on the topic.

Bankers were aware of the public's worries, he said. So most created separately capitalized subsidiaries on their own to handle securities work. This allowed them to separate the businesses and mollify the public, he said.

Not everyone is ready to give up on the universal bank. Mr. Ludwig said in his speech to the conference that bankers ought to be able to choose their structure. "Banking organizations in virtually all other major industrialized countries enjoy much greater latitude than U.S. banks in selecting their organizational structure," he said.

"In countries that give bank management the power to chose between the bank model and the holding company model, one rarely sees voluntary adoption to a meaningful holding company structure."

Ronnie Phillips, an economics professor at Colorado State University, also dismissed the criticisms of the universal bank. He said there is no economic need for a bank holding company and the Fed regulations that come with it.

"What Gene Ludwig and the OCC are up to is the better way to go," he said. "Why not have the Fed stick to monetary policy?"

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.