Mixed Banking

Commercial banking and Investment banking combined together is generally referred to as Mixed banking. Such banking of combining together the completely two different types of operations is a new development in many countries. Before this development, commercial banks were engaged in short-term financing while investment banks were engaged in long-term financing. 

The rationale of division of work was simple. Deposits of Commercial banks are of short duration and payable on demand or at short notice. Hence these banks are banks are required to keep their assets as liquid as possible so that assets always match liabilities in terms of liquidity. Any mismatch was avoided to prevent the banks from landing into liquidity troubles. On the other hand, investment bankers lent money for meeting the long-term need of the business and industry. They procured fund of longer duration to avoid any liquidity crisis. 

Separation of business between the two types of banks did not last long. At one stage, investment banks got involved into commercial banking primarily for augmenting their resources by way of mobilizing deposits to meet the growing need of industry. On the other hand, sensing market potential and being emboldened by greater resources commercial banks also did enter into the area of investment and long-term financing.

The result of mixing commercial banking with investment banking has been mixed, to say the least. Commercial banks in many countries landed into troubles and in the long run some even faced closure because of mismatch between short-term liabilities and long-term assets. In view of this new development, the desirability of mixed banking has been subjected to serious debate. Though professional bankers are found to be divided on the issue, yet majority is now found not to favor mixed banking. 

In fact, idea of mixed banking is gradually losing ground specially in view of development of different types of financial institutions to finance long term needs of the industry. Generally commercial banks now do not involve too much into term lending. Whenever they do, a limit is always drawn. As a result, the task of financing the industry is gradually shifting to investment, leasing and specialized institutions. However, recognizing the incompatibility of mixing investment banking with commercial banking, countries around the world have enacted legislation accepting the principle of bifurcation of these two systems of banking.