Separation of Retail and Investment Banking Operations Essay

Separation of Retail and Investment Banking Operations - Essay Example The need to separate the two operations is the central focus of this paper, presenting arguments for and against the move in detail. Arguments in support of separation of retail and investment banking operations Financial crisis is not a new phenomenon for the banking sector in U.K and beyond. From time to time, economic hardships that have resulted in financial crisis have been observed around the world. Year 2008 global financial crisis adversely affected financial systems in various economies. This necessitated the need to manage risks in the financial sector, which is primarily dominated by banks. Following this and other affecting factors, regulation, control and reforming the banking sector is essential. Separation of retail and investment banking operations is a positive move to take in the context of the above pursuit. That is, regulation, control and reforming financial services providers. Separating retail and investment banks would mean that the each of the two becomes a s tandalone legal entity. It is important to note that retail banks handle short term and long term payments, accept deposits and offer credit services by lending funds (De Jonghe, 2010, p. 387). On the other hand, investment banks primarily deal with financial instruments. In this regard, they are also referred to as casino banks. With the separation, it would mean that adverse effects experienced by either of the banks would hardly affect the other. That is to say that if the investment banking operations experience huge losses, the resultant negative effects would hardly affect retail banking operations especially deposits. Splitting the retail and investment banking operations is an activity that would bring forth intensive regulatory frameworks in a bid to achieve the desired outcome. The regulatory frame work adopted would be one that addresses each of the two banks as a unit independent of the other. In the situation of financial hardships, the retail banking sector would recei ve the attention of both the government and the taxpayers. The investment banking sector on the other hand would be accounted for by shareholders and investors in the same context. As a result, the adverse effects of financial crisis can neither be transferred to the retail bankers nor the government when the investment banking sector is affected. Investment banks engage in highly risky financial instruments (Upper, 2007, p.64). Tax revenues are normally used to back banking operations with or without operational risks. However, separating retail and investment banking operations would ensure that the taxpayers’ money only backs retail banking operations. The involvement of investment banks in risky financial instruments and related activities would therefore not constitute any financial burden to the taxpayers. Over and above the alleviation of financial burdens to taxpayers in times of financial crisis, individual customers to both retail and investment banks would be at an advantage. In absence of the separation, deposits in retail banks are highly influenced by investment activities. This is more so if different parts of the same bank handles both retail and investment banking operations. With the separation, the opposite of this scenario is true. However, lending risks are inevitable, but they are relatively easy to address (Modigliani and Miller, 1958, p.261–