“The high-risk business model of universal banks helped bring about the financial crisis. Universal banks rely on cheap funding from deposits and shadow banking liabilities to finance their speculative activities in the capital markets. By combining deposit-taking and short-term borrowing activities with underwriting, market making, and trading in securities and derivatives, universal banks create a strong probability that problems that occur in one sector of the financial industry will spread to others.
“In order to prevent such contagion, federal regulators have powerful incentives to bail out universal banks and protect their depositors and shadow-banking creditors. That is precisely what occurred during the financial crisis. To prevent future bailouts, Title II of the Dodd-Frank Act requires the Federal Deposit Insurance Corp. to liquidate a failed systemically important financial institution and to impose losses on shareholders and creditors.”
Read the full American Banker Op-ed by Arthur Wilmarth here.