Securities Activities in Banking Conglomerates: Should their Location be Regulated?

This paper reviews the arguments as to whether the location of the securities unit in a banking conglomerate should be subject to regulation. This review is complemented with evidence on the regulations and on securities units’ location in the G-10 countries and in the United States before the Glass-Steagall Act. The paper argues that correcting the safety net’s distortions and allowing banks to choose where to locate their securities units is a better alternative than retaining such distortions and relying on corporate separateness to limit the problems they may create. Separateness imposes costs and provides banks with insulation that is more apparent than real. However, if authorities opt for requiring separateness, a regulation allowing banks to choose between the bank-parent model and the holding-company model seems more appropriate than a regulation requiring them to adopt either one of these models.