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Investment banking and commercial banking are two divisions of the banking industry that provide substantially different services. Investment banks expedite the purchase and sales of bonds, stocks and other investments and aid companies in making initial public offerings (IPOs). Commercial banks act as managers for deposit accounts for businesses and individuals, although they are primarily focused on business accounts, and they make public loans through deposit money that they hold.
Since the major economic downturn beginning in 2008, a number of entities that mix investment banking and commercial banking have fallen under intense scrutiny, being looked at as the source of the downward trend. There is a great debate over whether the two divisions of the banking sector should operate under one roof, or if the two are best kept separate.

Federal Regulation

Commercial banks are highly regulated by a variety of federal authorities, such as the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC). Commercial banks are insured by the federal government, maintaining an ability to protect customer accounts and provide a certain level of security. Investment banks differ, as they are much more loosely regulated by the Securities and Exchange Commission (SEC). This offers less protection to customers, but allows investment banks a significantly greater amount of operational freedom.

The comparative weakness of regulation by the government, along with their specific business model, does give investment banks a higher tolerance of, and exposure to, risk. Commercial banks, on the other hand, have a much lower risk threshold. Commercial banks have an implicit duty to act in ways that keeps their clients' best interests in mind. The greater level of government control on commercial banks also decreases their levels of risk tolerance.

The Glass-Steagall Act

Historically, institutions that combine commercial and investment banking have been seen in a negative light. Some analysts have linked such entities to the economic depression occurring in the early part of the 20th century. In 1933, the Glass-Steagall Act was passed and authorized a complete and total separation of all investment and commercial banking activities.

However, Glass-Steagall was largely repealed in the 1990s. Since that time, banks have been able to engage in both types of banking under the same roof. Despite the legal freedom to expand operations, most of the largest U.S. banking institutions have chosen to remain operating as either a commercial or an investment bank, just as they were before the repeal of Glass-Steagall.

Benefits for Combination Banks

There are some benefits to the combination of the functions of investment banks and commercial banks. For example, a combination bank can use investment capabilities to aid a company in the sale of an IPO, and then use its commercial division to offer a generous line of credit to the new business, enabling the business to finance rapid growth and consequent increases its stock price. The combination bank can then additionally glean the benefits of increased trading in the form of commission revenue.

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