Question

Borrowing on the open market rather than from banks has become more common for bigger businesses over time. Commercial banks, which take deposits which are insured by the federal government in the U.S., have wanted to meet this loss of loan demand by becoming involved in underwriting new securities issues or trading securities for their own benefit. Why do we worry about allowing them to do this?

Answer 1

Allowing the commercial banks to get involved in underwriting new securities issue or trading securities for their own benefit is risky process. This is because these securities are risky as these are not covered in the financial regulation issued by the Fed and most of the times banks issue these securities to borrowers without taking into consideration their credit score background. This increases the chances of default. The main concern about the worry is these instruments lie outside the purview of any financial regulation and in cases of default no body can be held accountable. Thus, either these instruments should be brought under the purview of the financial regulation or else banks should not be allowed to issue these.