The last time there was a severe banking crisis in the US, regulators decided that a contributory factor in the collapse was that financial institutions were involved in both securities and commercial banking.

The last time there was a severe banking crisis in the US, regulators decided that a contributory factor in the collapse was that financial institutions were involved in both securities and commercial banking.

The Glass Steagall Act followed, enforcing a separation and creating, amongst other institutions, JP Morgan (the commercial bank) and Morgan Stanley (an investment bank). Today, Morgan Stanley has converted to bank holding company status thus recombining the two types of activity that in combination were believed to have been a contributory factor to that previous crisis.

Morgan Stanley, to the surprise of many people, already owns a bank and has more than 3 million retail accounts and had $36 billion in bank deposits as of 31 August 2008. But the firm’s new status provides it with ongoing access to the Federal Reserve Bank Discount Window and expanded opportunities for funding.  It is also expected to look to its new shareholder, Mitsubishi MFJ for deposits.

Other “investment banks” also own banks and indeed, Merrill Lynch is the tenth largest commercial bank in the US!  It seems that retail and private bank customer deposits have for some time been attractive to investment banks which want to finance risky positions.

This all squares with the “One Bank” philosophy that Credit Suisse has espoused for some time now, in its advertising. UBS has followed the same approach. But fashions change. Only a few weeks ago Peter Kurer, the new chairman of UBS, changed the group’s tune when he said that a strategic review had “clearly revealed the weaknesses associated with the integrated ‘one firm’ business model”.

UBS’s answer to these weaknesses was to inform us “that it was going to establish its three main business units – investment banking, private banking and asset management – as standalone entities that would no longer share each other’s infrastructure, people or capital. They would not be legally established as subsidiary companies, but would effectively function as such. All they would share would be the UBS brand, and ultimate oversight by the group management.”

Naively, I thought the UBS name was now what was scaring off the wealth management customers and that group management had already been proven negligent in their oversight of the investment bank. Truly separating manufacture from advice and ensuring a truly open platform for wealth advisors might have been a better answer.

The weaknesses Mr Kurer referred to were that “cheap” funding provided by lavish income from its wealth management arm and a lack of oversight allowed UBS's investment bank to build up huge trading positions, which left it nursing writedowns of $42 billion when they soured.

I have to express my gratitude for the candour of the new chairman since all he is saying is that what has brought UBS low is exactly what brought the US financial system low in the 1930s. And yet what the regulators now seem to want is for every investment bank to combine with a commercial bank so that they have the “security” of retail bank deposits to ensure they can carry on business. It’s not as if commercial banks don’t suffer bank runs. After all, it was Northern Rock, a bank, which first saw voters and taxpayers of the UK queueing in the street asking for their deposits back.

We do have to ask whether agglomeration is the correct solution for the problem we have today or if separation, specialisation and breaking up of large banks would not be better. With only three or four major banks in the US and UK we certainly have a potential monopoly problem in the deposit and loan market.

Let us also hope that in future commercial banking regulation can stop banks squeezing under the fence with dodges such as SIVs and other means by which some of the largest European banks have managed to achieve a true capitalisation ratio of only around 2 per cent i.e. 50 times geared when I had always thought that the rules said no more than 12.5 times geared.