Comprehensive Guide to Universal Banking: Services, Background, and Governance Rules
In the financial landscape of the United States, banks that specialize in investments are more common than their universal counterparts. However, universal banking, which combines the services of a commercial bank and an investment bank, offers a wide range of benefits and services under one roof.
The concept of universal banking was given a boost in 1999 with the passing of the Gramm-Leach-Bliley Act. This legislation partially repealed the Glass-Steagall Act of 1933, which had previously prohibited commercial banks from providing investment banking services. The Gramm-Leach-Bliley Act allowed commercial banks to engage in investment banking activities, opening up new opportunities for financial institutions.
Universal banking allows customers to manage all of their finances in one place, potentially offering cost savings. Banks can have multiple revenue streams by providing a variety of different services and charging for them. Notable universal banks in the U.S. include JPMorgan Chase, Bank of America, and Wells Fargo, among others.
However, the growth of universal banking in the U.S. was slowed during the Great Depression due to the strict regulations imposed by the Glass-Steagall Act. The 2008 financial crisis led to the acquisition or bankruptcy of institutions like Lehman Brothers and Merrill Lynch, raising concerns about the risks associated with universal banking.
Despite these challenges, universal banks can offer a multitude of services, including loans, deposits, asset management, investment advice, and more. Banks in a universal system may still choose to specialize in a subset of banking services. For example, the Liechtensteinische Landesbank AG (LLB) is a universal bank that offers foreign currency accounts and a variety of investment services, including investment accounts starting at 50,000 Swiss francs.
Regulations impacting universal banking in the U.S. continue to evolve and change. The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010 in response to the 2008 financial crisis, restricted the ways banks could invest. However, the Economic Growth, Regulatory Relief, and Consumer Protection Act (also known as the Crapo Bill) was enacted in 2018, rolling back some of the Dodd-Frank restrictions.
One disadvantage of universal banks is the potential for risk concentration for the client and a conflict of interest in certain areas between bank and investor. However, the benefits of convenience and multiple service offerings often outweigh these potential drawbacks for many customers.
Interestingly, despite regulatory changes, universal banking remains more prevalent in Europe than in the U.S. Banks like Deutsche Bank, HSBC, and ING Bank are examples of universal banks that have thrived in Europe.
In conclusion, universal banking offers a comprehensive approach to financial services, allowing customers to manage all of their finances under one roof. While it comes with its own set of risks and regulations, the benefits of convenience and multiple service offerings often make it an attractive option for many customers.
