In what some have called "populist attacks on Wall Street" Republican and Democratic senators have proposed that the financial reform legislation essentially separate commercial banks from investment banks.
Separating banking and other financially related products may have worked in the 18th or 19th century, but we are not living in a time when a bank can take in savings, grant loans and calculate an interest rate accordingly.
Today spreads are paper thin, no matter what the interest rate received, and banks must hedge their bets accordingly.
Additionally, borrowers have grown in size and complexity as global trade has become not only common, but essential to compete effectively.
If loans were guaranteed to be repaid there might be a way to work with the paper-thin margins and get by, but in a realistic world banks need investors to mitigate the risk of loss. As a result, today's financial institutions are very tightly interwoven with investments, brokerages, insurance and anything else directly related to money flow.
This structure is far too progressive to be undone.
Similarly, a financial institution engaged in simplistic deposit-lending banking would not lend money overseas or to multinational corporations, because of the foreign currency risk; it would not lend on anything tied to the commodities market, such as extending a working line of credit to the airline industry to pay for jet fuel.
Further, foreign banks that are not required to separate banking and investments would be able to offer much more competitive rates, thus sending more business (and jobs) overseas.
The U.S. has laid a solid foundation of combined banking, investment insurance institutions for more than a century, and they will likely need to remain that way to serve the complex corporate needs and to continue mitigating associated risks.
