Banking and Commerce: How Does the United States Compare to Other Countries?

Recent attempts to repeal the Glass-Steagall Act, which would allow commercial banking to mix with investment banking, have again initiated debate over current regulation prohibiting the affiliation between banking and commerce. Although participants in that debate have put forward many arguments based on U.S. historical experience, international evidence, and research results, the debate remains unsettled. There is no consensus as to the extent of the affiliation between banks and nonfinancial firms throughout American history. In some cases, this lack of consensus is the result of differing definitions of banking and commerce. In other cases, it results from considering different ways through which the corporate affiliation between banks and firms can be implemented. Still in other cases, the difference results from the use of like terminology, “mixing banking with commerce,” to indicate two different ways to implement the affiliation—for a bank to own a stake in a firm, or for a firm to own a stake in a bank. As we will see, each of these two forms of affiliation has been subject to different regulations. Therefore, using either one of them as a basis for measuring the association between banking and commerce will lead to different conclusions. Any dividing line between banking and commerce is bound to be imprecise. The legal definition of banking itself has changed over time and has been subject to many interpretations. Throughout this article, the term banking is used to denote commercial banking in its simplest form; therefore, a bank is defined as a firm that accepts demand deposits and makes loans. This allows, when necessary, a distinction between commercial banking and investment banking, which includes activities such as brokerage and securities underwriting. Commerce is used to denote all nonfinancial firms—that is, commercial and industrial firms. The article assumes that the association between banks and firms may be implemented (1) through one party undertaking the other party’s activity inhouse; (2) through one party’s investment in the capital of the other party; or (3) through a parent company, such as a bank holding company (BHC), which owns a stake in both a bank and a firm.1