ABSTRACT

The government regulation of financial markets introduced in most developed countries during the 1930s represented an attempt to impose a particular form on financial markets that would make them less prone to the instability experienced during the inter-war period. The performance of the German system in the inter-war period conforms to the presumption of the inherent instability associated with mixed banking. Despite formal compartmentalization of the US system, commercial banks also participate in this process of providing liquidity to capital markets, if only indirectly. The difficulties that these restrictions have caused in the US have been alleviated by the operation of the centralized clearing organizations that have allowed the smaller banks to operate as partners in a larger single bank that is not bound by the same regional controls. The "facile" answer is that it's not their money but the depositor's that is at risk in a mixed bank.