Debate of separating retail banking from investment banking 02051 Essay

Debate of separating retail banking from investment banking 02051 - Essay Example The concept was highlighted for the first time in Liikanen report where the structural reform was proposed for banks within the European Union (Vickers, 2013). Arguments in favour of structuralism suggest that risk level is very low in retail banking and these facilities are essential while investment banking is inessential and also relatively risky in terms of transaction. Further arguments point that the separation will ensure that public safety is retained by means of low risk and essential activities while market forces freely regulate risk taking activities in investment banking (Vickers, 2013). However, things are not as simple as these arguments because retail banking is equally risky for it is prone to credit risk due to lending activities. A number of authors argued that mere separation will not protect the banking sector from risk externalities (Peston, 2011; Halligan, 2014). Consequently, the paper evaluates the current situation in this regard, effectiveness and consequences of the separation of banking sector on consumers and the economic system. The proposal of banking separation is result of financial crisis and reckless risk appetite of banking and consequently, it is imperative to briefly discuss the crisis and its impact which led to the ongoing situation. According to Wehinger (2013), players of private sector noted that profound improvements have been undertaken in the asset management industry and banking sector in terms of risk management as a result of the crisis. Post crisis, significant planned changes have been brought in European banks while structural changes in business models have been brought in by various global banks. Several regulatory rules have been proposed for improving effectiveness of risk capital model and treat the issue of capital scarcity with utmost sincerity. It has already been mentioned that commercial banking is not devoid of flaws and risks and consequently, it was established that commercial and