There is widespread agreement that the financial structure in the United States is badly out of date and that breaking down barriers to the integration of banking with the rest of financial services would produce a more efficient and competitive system.
The contrast between the United States and Europe is striking. Under the Second Banking Directive, banks can take deposits and make loans throughout the European Community. They can underwrite and distribute any type of security, either directly or through wholly owned subsidiaries. They can own and operate insurance companies. Indeed, banks can affiliate or take substantial equity positions in any type of financial or nonfinaneial entity. There are no firewaUs restricting the relationships between a bank and its affiliates and subsidiaries, other than ordinary legal lending limits. And there are no holding company capital requirements.
These broad banks and broad banking organizations can offer convenient and costeffective financial services to their customers. By comparison, the U.S. stmcture of narrow banks and narrow bank holding companies subject to thick firewalls is cumbersome and inefficient. Moreover, it is a structure that will not permit U.S. banking organizations to be competitive in the highly integrated global marketplace for financial services.
Despite the acknowledged inadequacies of our own financial structure, some people argue that it could be dangerous to allow banking organizations to engage in a broader range of activities because of risks to the safety net. Richard Herring and Anthony Santomero in their article, "Corporate Structure in a World of Financial Conglomerates," generally favor adopting a universal banking structure in the United States, based either on the German or British models, but they express reservations because of such concerns. Rather than dwell on the benefits of universal banking, I would like to focus on their concerns and what to do about them.