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Why were U.S. commercial banks forbidden to offer investment banking services for several decades? How did...

Why were U.S. commercial banks forbidden to offer investment banking services for several decades?
How did this affect the ability of U.S. banks to compete for underwriting business?

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Answer #1

US was under Glass-Stegall act which forbidden commercial banks to provide investment bank services. This was in a way to avoid the conflict of interest of the bank in case if they have customers in both the sell side and buy side of the market.

However this restricted the ability of the banks to do big business compared to its international peers who have less stringent restrictions than US banks. Underwriting business for IPOs was largely based on the benefits provided by the banks and economies of scale provided a larger role in getting such business. Due to Glass-Stegall act, it was difficult for US banks to make a better deal than its international peers.

Hence in an aim to increase profitability and offer a fair competition, Glass-Stegall act was removed.

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