This paper reexamines the separation of commercial and investment banking in the context of modern wholesale financial environment, dominated by a small cohort of “systemic” institutions. The paper traces the pathology of regulation and deregulation from the watershed events of the 1930s to the systemic financial failures of the recent past. It then considers the structure, conduct and performance of the wholesale financial industry and how firms that cannot be allowed to collapse get that way. Based on the industrial organization of global wholesale finance, the paper then examines the available regulatory techniques, and makes some judgments as to their relative promise in promoting future financial stability with least possible dislocation of financial efficiency, proposing benchmarks for the calibration of proposals for regulatory reform. The paper then evaluates functional separation and carve-outs of high-risk activities that cannot defensibly be conducted within systemic financial firms in the real world of power politics and regulatory capture. The paper concludes that blanket condemnation of the functional-separation features of the 1930s financial reforms is unwarranted in the light of ongoing experience, and that it is time to revisit this issue in reconfiguring the global wholesale financial architecture
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