There are some different potential solutions. I have already observed that the market itself is often capable of solving the problems. This can be achieved, for instance, by customers making demands for information on various conflicts of interest. However, the collection and distribution of information is not free. And as information contains a strain of public goods, there is a risk that the market solution will generate too little information. It may therefore be necessary in certain contexts to have regulations stipulating that information on conflicts of interest must be made public. Regulations concerning greater insight into various persons’ incentives may limit the effects of different conflicts of interest. It would help outsiders to assess the quality of the information provided. A more drastic solution would be to require that activities exposed to conflicts of interest should be managed by different companies, or even different groups. The Glass Steagall Act in the United States, for instance, required that investment banks and commercial banks must be legally separated. However, there are clear disadvantages with forcing a separation of different activities through legislation. All regulation also entails costs - both explicit and implicit costs. It is important from society’s point of view that these costs do not exceed the usefulness of the regulation. One cost of separating various activities is that it makes it difficult, or impossible, for financial intermediaries to benefit from synergies and economies of scale.
A clear example of this is contained in the conflict between traditional commercial banking and investment banking, which is my subject today. A bank that lends money to a company normally gains access during the credit application process to special information about the company - information that is not publicly available. The bank makes an investment in the information on the company and therefore usually has an information advantage in relation to other banks and outside parties. This  2  BIS Review 47/2004  investment can also mean that the bank can offer the company investment banking services in a more efficient manner. The fact that a company seeking funding in the capital market has access to bank credit is often regarded by the market as a positive signal. It means that a professional agent has analysed the company and found it creditworthy, i.e. been willing to risk his or her own capital in it. The information about the credit functions is a quality signal or a certification. At the same time, opportunities arise to make use of conflicts of interest when a bank functions as both credit-granting institution and adviser or guarantor in new issues. If the prospects for a company that has loans with the bank deteriorate, it may be in the interests of the bank to reduce some of its credit risk by aiding the company with a new share issue. In this way, the bank can pass on some of the credit risk to the shareholders.