Centre for Economic Policy Research

General discussion
Edward Kane noted the absence in the Report of any reference to event studies
showing that decisions relaxing the restrictions on banking activity generally
helps large US banks and is detrimental to US securities firms. Even more 
disturbing evidence, though, is that the Gramm-Leach-Bliley Act of 1999 hurt
non-financial corporations, especially corporate customers of large banks that are
active in the securities business. As taxpayers, corporations may be contributing
to the extension of the safety net. Furthermore, lesser safety-net subsidies for 
securities firms would reduce the number of such firms, thereby relaxing the 
disciplinary effect of potential market entry.
Neal Soss pointed to an identification problem. Lending, securities activity and
ratings are observed simultaneously. How much is really observed that is due to
the market power of customers of the banks? 
Eugene White emphasized that in the period prior to the Glass-Steagall Act, the
different organizational structures setting up securities subsidiaries attempted to
mitigate the problems of conflict of interest by providing more transparency. In
general, exploitation of conflicts of interest by financial conglomerates was 
controlled. Although there is less work on whether the holding of direct equity
stakes by banks creates exploitable conflicts of interest, the small literature 
indicates that this has not been a serious problem.
Antonio Borges came back to the risks associated with credit granting.
Investment banking generates very high returns. Since this is a permanent feature,
there must be some barriers to entry in this market. Given the change in 
regulation in the United States, large universal banks could use their size and
financial strength to make their way into the investment banking market through
subsidizing credit. The central issue is mispricing of credit and this generates an
excess demand for credit.
Gertrude Tumpel-Gugerell concluded the session by saying that conflicts of
interest are always a complex problem. The views about more regulation are split,
although there is a broad agreement that more transparency and disclosure is 
beneficial. Moreover, behavioural aspects such as the loss of business ethics must
be taken in consideration.
Discussion and Roundtables 99

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