The combination of securities and commercial banking activities in a single organization provides opportunities for the senior management and boards of directors to be increasingly influenced by individuals with a short-term perspective. As a result, the increased propensity of these corporate leaders to take high risks for short-term gain leads to more of a short-term-returns culture throughout the organization.
Historically, bank investments were restricted to loans and investments in investmentgrade securities. As demonstrated in the financial crisis, the complexity of many assetbacked securities made it very difficult to determine their credit quality. As a result, “complicated” multilayer structured securities should be treated as other non-investment-grade assets are, and commercial banks should be limited or prohibited from holding them.