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Question 14.2: Why were U.S. commercial banks forbidden to offer investment...

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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The Glass-Steagall Act prohibited commercial banks from offering investment bank services for primary two reasons. One, the bank could force a customer seeking a loan to buy the securities that they were trying to sell as a condition for getting a loan, and second, the bank would be exposed to increased risk due to the volatile and cyclical behavior of IB activity. U.S banks were not able to compete for underwriting business with foreign banking firms who in turn captured U.S. customers.

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