CASINO BANKING

Casino Banking Separation from Other Commercial Banking Activities



Casino Banking Separation from Other Commercial Banking Activities

Introduction

Commercial banking industry comprises of banking enterprises that provide commercial, industrial and consumer loans as well as offering deposit facilities to their customers. These corporations also accept term deposits, extend mortgage and real estate finance and invest in high-grade securities. The term 'Casino Banking' refers to the alleged investments by the banks in speculative and high financial risk assets with the intention of achieving higher return on its investment.

Major products and services of commercial banks involve commercial deposits, secured consumer loans, consumer deposits, secured business loans, non-interest income, and investment in capital markets. Investment risk can arise from several transactions ranging from loans to trading derivatives under casino banking. Credit risk in the context of trading derivatives is typically classified as counterparty risk that raises concern on the role of casino banking in commercial banks operational activities (Davies, 2010, 23).

The main regulatory issue that the casino banking split are designed to address is that banks, because of their unique access to deposits from the public, the value of which is guaranteed by the commercial banks, can take speculative positions in financial markets (Bhide, 2010, 111). If this activity leads to profits, these will accrue to shareholders and staff (through bonuses), whereas catastrophic losses that might lead to corporate failure will be borne by the state - both through the deposit guarantee and the practical need to 'save' any bank that might threaten the stability of the banking system (House of Lords, 2009, 44).

Investment under Casino Banking and Risks to Commercial Banks

Banking Regulators, in what is seen as the biggest clamp down on 'casino banking', seem to think it is absurd to allow the banks to use taxpayer-guaranteed customer deposits to ramp up investment banking and other risky operations which are being referred to as 'casino banking' (Ibis World, 2011a). Pedants point out that this is a misnomer, drawing attention to the extremely sophisticated risk handling at the casinos. The regulators are going ahead and beginning to clamp down on the riskier aspects of the banking, starting with the House of Representatives approving a landmark reform bill.

Commercial banks perform a vital role in the markets within which they operate, providing businesses, consumers and governments with access to financial products and services (Ibis World, 2011a). They ensure the sustainability of the financial system by bringing together lenders and borrowers, which allows for the flow of funds to occur. The collapse of the UK subprime mortgage market and consequential global recession shook the world's financial system and threatened to destroy the core foundations that it relies upon to function (Ibis World, 2011a). Throughout the world, commercial banks suffered unprecedented losses as their loan loss provisions increased due to their borrowers becoming unable to repay debt obligations (Bhide, 2010, 131). Coupled with this, banks wrote off billions of pounds worth of assets and speculative investments, as values depreciated, during a time when the cost ...