What is Universal Banking?

Universal banking is a financial term used to describe a bank that provides a wider variety of services as compared to a commercial bank. Popular in Europe, universal banking can not only manage personal accounts for customers but also underwrite corporate dealings, provide investment services, and act as a stockbroker. Sometimes called financial supermarkets, universal banks have many supporters and fervent detractors throughout the financial world.

In some regions, stockbrokering and investment services have never been separated from the business of savings and loan operations. In Germany and Switzerland, for instance, banks have almost always offered universal services under one roof. Other countries, such as the United States, have generally preferred to separate investment services from regular banking, although the once strong lines became quite blurry in the late 20th and early 21st century, as many banking conglomerates began to offer wider varieties of services.

Although the concept has existed in mainland Europe for centuries, universal banking has recently seen an upswing as a result of the financial crisis of 2008, in which many American financial institutions failed in the wake of recession. To survive the disaster, many investment and commercial banking groups merged, forming universal banks. These mergers did manage to keep several major financial institutions afloat, though some suggested that the joining ignored the legal distinction between commercial and investment banks legislated by the Glass-Steagall Act of 1933.

There are many arguments about whether universal banks are good or bad for the consumer and the financial sector. Some argue that the deposits made to the commercial wing of the bank, such as into personal saving or checking accounts, help keep the bank afloat if poor investment decisions occur. This, proponents argue, can prevent a financial crisis by keeping a struggling bank afloat in a bad market. Proponents point out universal banking provides one-stop shopping for all financial needs, cutting down on paperwork, confusing documentation, and clarifying assets and responsibilities by having one general account.

The danger in universal banks is that they may become too large to run properly, leading to severe oversight errors and the possibility of financial catastrophe if the entire bank folds. With universal banks based in smaller countries, such as Switzerland, growth of a bank may be somewhat limited by the size of the market. Massive, multi-national banking groups, however, have an almost unlimited market and therefore the chance to grow incredibly by offering universal services. In an enormous universal banking conglomerate, chain of command may become confused, risk may be pushed into generally stable markets, and the impact of failure is far greater.