Universal Banking

What is 'Universal Banking'

Universal banking is a banking system in which banks provide a wide variety of financial services, including commercial and investment services. Universal banking is common in some European countries, including Switzerland. In the United States, however, banks are required to separate their commercial and investment banking services. Proponents of universal banking argue that it helps banks better diversify risk. Detractors think dividing up banks' operations is a less risky strategy.

BREAKING DOWN 'Universal Banking'

Universal banks may offer credit, loans, deposits, asset management, investment advisory, payment processing, securities transactions, underwriting and financial analysis. While a universal banking system allows banks to offer a multitude of services, it does not require them to do so. Banks in a universal system may still choose to specialize in a subset of banking services.

Universal banking combines the services of a commercial bank and an investment bank, providing all services from within one entity. The services can include deposit accounts, a variety of investment services and may even provide insurance services. Deposit accounts within a universal bank may include savings and checking.

Under this system, a bank can choose to participate in any or all of the permitted activities. They are expected to comply with all guidelines that govern or direct proper management of assets and transactions. Since not all institutions participate in the same activities, the regulations in play may vary from one institution to another.

It is important not to confuse the term "universal bank" with any financial institutions with similar names.

Universal Banking in the United States

Due to strict regulation, the universal bank is was a common occurrence within the United States. This is due to the Glass-Steagall Act of 1933. Recent developments have removed a number of the barriers to the creation of a universal bank, though they are still not as prevalent as they are across many European countries. Further, the United States has banks that focus purely on investments, which is highly uncommon in the rest of the world.

Impact of the 2008 Financial Crisis

The 2008 financial crisis led to a number of failures within the investment banking system in the United States. This led to the acquisition or bankruptcy of a variety of institutions. Some notable examples include Lehman Brothers and Merrill Lynch.

Examples of Universal Banks

Some of the more notable universal banks include Deutsche Bank, HSBC and ING Bank. Within the United States, Bank of America, Wells Fargo and JPMorgan Chase qualify as universal banks.