Multifunctional banking and financial fragility: What should banks do

This dissertation traces the evolution of the U.S. banking system since the 1980s, with a specific focus on the role of the relaxation and eventual repeal of Glass-Steagall Act (GSA) on the stability of the financial structure. While the U.S. economy has experienced a number of episodes of instability and even mini-financial crises since the 1970s, the Global Financial Crises was the first one that was systemic, encompassed a wide array of institutions and markets and pushed the economy into a prolonged recession. The question that this study attempts to answer is whether the repeal of the Glass-Steagall Act has made the U.S. financial structure so fragile that another system-wide debt-deflation, and a Great Depression 2.0 has become likely. It examines the activities of banks following deregulation and their involvement in the securitization process. It provides evidence that universal banks have been at the forefront of securitization, and without their involvement market-based finance would not have become the new model of banking. Furthermore, as competition between large banks has intensified, following the repeal of the Glass-Steagall Act, their underwriting standards have suffered and their task of impartial credit analysis has been compromised. The dissertation places the changes occurring in the banking system within the context of what Hyman P. Minsky termed Money Manager Capitalism. Minsky's view of what banks should do informs the analysis throughout the work.