Big Mistake to Repeal Banking Legislation

Lloyd Greif contends that the separation of “commercial” banks and “investment” banks imposed by the New Deal banking legislation in 1933 should be repealed (“Glass-Steagall Repeal Would Have Far-Reaching Benefits to Public,” Sept. 17). I believe this would be a very big mistake; the public would not benefit from a merger of commercial and investment banks. The American economy is strong and dynamic precisely because of the separation, and our economy would suffer if the separation were removed.

Most of us never deal with investment banks; we get our checking accounts and auto loans from the commercial banks. However, the investment banks provide a crucial service for the economy.

Investment banks finance growing companies and underwrite new stock issues. Mr. Greif contends that more capital will be available for business if investment banks combine with commercial banks, and as evidence he mentions the banking powerhouses abroad, such as in Germany. In fact, the German experience offers good proof why we should not allow commercial banks to get into investment banking. I have spent most of the past three years observing the economy in Germany and have come to the conclusion that we do not want the German banking system here.

German “universal” banks do everything. They offer consumer accounts and loans; they also underwrite stock issues and finance business. In fact, the German universal banks control the German economy with an efficient, iron hand. German middle-market and emerging growth companies (Mr. Greif’s clientele) must go to the universal banks to meet their needs for capital growth, but the German universal banks do not meet this need effectively. As a result, there are few new enterprises and few young entrepreneurs in Germany today.

The universal banks protect and serve the well-known giant companies as well as the mature middle-market companies which were formed in the “Wirtschaftswunder” years after World War II, but the banks provide little risk capital for new enterprises. Few new companies are formed in Germany today; the German economy is not generating the new enterprises necessary to maintain economic growth. This is one major reason the German economy is under strain. Watch for severe economic problems in Germany in the years to come.

The reason why the universal banks do not provide risk capital to new enterprises is simple. Universal banks in Germany, like commercial banks in the United States, are necessarily dominated by the proper banking mentality which emphasizes security, prudence, credit-worthiness and stability.

Investment bankers are less concerned about security, more focused on the rewards to be gained if a risk succeeds. These people provide the risk capital necessary for a dynamic economy; commercial bankers cannot. There are almost no investment bankers in Germany today. In fact, the universal banks are trying to expand by buying investment banks in London. I do not believe this development can succeed; the risk-averse mentality of the commercial banker is hostile to the entrepreneurial mentality of the investment banker.

The American economy needs stronger national commercial banks and investment banks. We do not need a combination of the two which will stifle economic growth.

DANIEL M. EVANS

Visiting Professor

San Jose State University