What Is Universal Banking?

Universal banking is a system in which banks provide a wide variety of comprehensive financial services, including those tailored to retail, commercial, and investment services. Universal banking is common in some European countries, including Switzerland.

In the United States, by law 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.

Key Takeaways

  • Universal banking is a term for banks that offer a wider variety of services than their competitors, or when compared with traditional banks.
  • Universal banking is not yet common in the United States, but it's growing; right now, banks in the United States focus more exclusively on investments than their European counterparts.
  • Banks in a universal system may still choose to specialize in a subset of banking service, even though they technically offer much more to their client base.

How Universal Banking Works

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.

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.

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, banks 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. However, 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 has been slow to grow, encountering resistance before it is able to be 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.

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.

That said, many financial services providers in the U.S. today offer a range of services from banking, loans, mortgages, insurance, and investments either under one roof or through an affiliate network with partner firms.