Centre for Economic Policy Research

Figure 5.3 Monthly NYSE stock sales, 1920-30
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Unlike the case of combining investment banking and insurance at the 
beginning of the century, there was considerable experimentation in how to
structure intermediaries that combined commercial and investment banking.
Initially, most investment banking activities carried out by commercial banks
were in internal bond departments.
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The National Banking Act of 1864 only 
permitted banks to own or handle ‘evidences of debt’, thus excluding common
stock. Furthermore, when commercial bank customers who were dissatisfied with
investment advice or the bonds sold to them by a bond department sued 
national banks, the courts found that the plaintiffs could not recover damages
because the banks were conducting a business that was ultra vires or beyond their
corporate powers (Peach, 1941). Thus, although many banks operated bond
departments, there was some doubt as to their legal status until the McFadden Act
in 1927 explicitly permitted national banks to underwrite and deal in bonds. 
While the McFadden Act clarified national banks’ powers, it did not result in
more bond departments, as securities affiliates became the preferred vehicle for a
securities business. Incorporated under the general states’ laws of incorporation
and separately capitalized, affiliates had few restrictions on their non-bank 
activities.
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Typically an affiliate had a name very similar to that of the parent
bank; and its offices were in the same building. These affiliates were linked to their
parent banks by one of four devices:
1. each shareholder of the bank became a pro rata shareholder of the affiliate;
2. the stock of the affiliate was held by a holding company that also owned the
stock of the commercial bank;
Conflicts of Interest in Universal Banking 61