Financial markets are undergoing generational changes, requiring institutions to adapt or risk their demise, yet banks cling to obsolete business models such as universal banking and originate to distribute.

The universal banking model has been revived during the credit crisis by regulators and institutions like Citigroup Inc. among others. They believe that stability of earnings and deposit funding, compared to the stand-alone investment bank model, are the keys to success. Unfortunately, they have drawn the wrong lessons from the demise of stand-alone investment banks. The latter failed because of a toxic combination of high leverage, short-term funding, and large, disastrous bets on housing rather than because they were not universal banks.

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