Comments on Rajan and James
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Description
Rajan’s chapter extends the author’s prior theoretical and empirical work on bank entry into the securities business. Here, he offers a balanced and thoughtful account of the normative case for and against such entry. To his credit, Professor Rajan avoids the temptation to support one side or the other in this debate. Theoretical arguments can be developed both for and against universal banking, but everything depends on the magnitude of the effects, and on this, Rajan observes, we have very little evidence. Legislatures and courts, unlike scholars, must have a bottom line—whether or not to permit a form of universal banking in the United States. Professor Rajan’s recommendations seem eminently sensible. In the United States, with a highly efficient economy—and, I would add, an effective and vigorously enforced antitrust policy – there is no need to limit bank entry into securities (putting aside the “too big to fail” problem). If universal banking is not efficient, it will not survive in the competitive marketplace. On the other hand, in developing economies, Professor Rajan observed that one cannot necessarily rely on market forces to generate efficient outcomes. He suggests that the better approach might be to start out with specialized banks in order to allow the development of a vigorous, competitive, independent securities industry. It should be noted that Professor Rajan’s tentative endorsement of universal banking in the United States would not appear to require significant changes in governing law. His concern is for securities firms making commercial loans, and there is nothing in the Glass-Steagall Act that prohibits such an activity. The Glass-Steagall Act regulates overlaps between deposit banking and securities underwriting, but does not prohibit securities firms from making loans.
Source Publication
Universal Banking: Financial System Design Reconsidered
Source Editors/Authors
Anthony Saunders, Ingo Walter
Publication Date
1996
Recommended Citation
Miller, Geoffrey P., "Comments on Rajan and James" (1996). Faculty Chapters. 2040.
https://gretchen.law.nyu.edu/fac-chapt/2040
