Are Universal Banks More Risky?

Abstract

This paper studies whether universal banks exhibit more risky behaviour and require additional governance mechanisms compared to pure-play commercial banks. Using a unique setting of the repeal of the Glass-Steagall Act of 1933 which removed barriers to universal banking in the United States, this paper tests whether commercial banks that become universal exhibit more risky behaviour. This quasi-experimental setting also allows testing the impact of reintroduction of universal banking in the United States on banks’ risk profiles and governance mechanisms. Preliminary findings suggest that there is no observable difference in risk characteristics between universal and pure-play commercial banks. Furthermore, CEO pay-structure and compensation do not appear to be driven by the choice of the universal banking model. These findings add to the debate on whether universal banks are risky and require different governance mechanisms compared to the pure-play commercial banks.