Universal banks are banks that can provide a variety of financial services like commercial banking, investment banking, mutual funds, insurance, credit card facilities, merchant banking, underwriting etc. Unlike niche banks, they can use funds generated from one service into another service. For example, big banks of USA used collateral of housing loans as securities in the financial markets. It converted illiquid assets of banks into liquid source of money in the financial market. Universal banks have their own bright and dark side, that needs to be balanced, in order to ensure economic harmony in a country.
The major advantage of universal banking is economies of scale. By providing multiple services, they are able to gather more funds at their disposal. The result is better price points for the clients/ customers. Other banks end up being more expensive than universal banks.
Another major advantage of universal banks is availability of all services under one roof. High value customers like businessmen, corporate houses, high net-worth individuals and governments are attracted to universal banks because they provide all possible financial services. Customers do not need to run elsewhere in order to fulfil their financial needs.
Universal banks provide depth to the financial markets by linking it with the commercial banking and other markets. It helps in expanding the financial markets in an economy
Universal banks, by providing all possible financial services to customers, help in financial inclusion. Customers are encouraged to undertake insurance, to create a diversified portfolio by investing in modern opportunities and to stay financially aware. This helps in financial growth of an economy
There are some disadvantages or threats attached to universal banking too-
Failure of one universal bank threatens the entire economy due to contagion effect. Governments are forced to bail- out such banks and it often results in irresponsible banking on their part, knowing that the government is available to support them. Thus, moral hazard.
These banks often involve in miss-selling, forcing customers to invest in opportunities they should not be investing in. Many customers end up losing money due to ill-informed financial decisions.
Universal banks connect one financial market to the other. Bad regulation or irresponsible activities in one financial market has an equivalent impact on the other market. This makes all markets irresponsible after a certain point. In USA, the 2008 financial crisis was due to irresponsible behaviour of stock market brokers but the commercial banks lost money due to such behaviour.
Universal banks can hide their bad behaviour for a long time due to the complexity of financial transactions. This results in creation of big financial bubbles, which can ultimately topple the entire global economy.
Just like other businesses, universal banks have their own positives and negatives. The solution lies in healthy and independent regulation that can control the bad behaviour and encourage the good behaviour of these banks. The phenomenon of universal banks is here to stay, we can make it sustainable through good regulation