Commercial banking was a good business all through the Great Depression.
Saturday, May 2, 2009 at 09:23AM A recent analysis by Daniel Gros of data from the Great Depression reveals that profits of commercial banking held up much better than profits in other financial services and non-financial businesses. This was a reason why the Glass-Steagall Act of 1933, separating commercial banking from investment banking, made sense and why its repeal in 1999 did not. Since the repeal, most of the largest banks have combined commercial banking with investment banking and other financial services. Not surprisingly, the recent losses and valuation declines in the other businesses are inhibiting commercial lending now. Daniel Gros:
The resilience of "normal" banking operations to a recession or even a depression strengthens the case for a separation of commercial and investment banking activities. The classic banking operations of deposit-taking and lending tend to remain profitable even under stressed conditions. But this classic function of banking would not be such a cause of concern today if the investment banking arms of banks had not gotten into trouble by investing in "toxic" assets. At present, the authorities in both the US and Europe have little choice but to make up for the losses on "legacy" assets and wait for banks to earn back their capital. But to prevent future crises of this type, policymakers should make sure that losses from investment banking arms cannot impair commercial banking operations.
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