Are Universal Banks Better Underwriters? Evidence from the Last Days of the Glass-Steagall Act

Abstract

It has often been argued during the recent credit crisis that banks’ involvement in investment banking activities might have had an impact on the intensity of their underwriting standards. We turn to evidence from the period prior to the revocation of the Glass-Steagall Act in the United States and analyze whether investment banks or section 20 subsidiaries of commercial banks underwrote riskier securities. We compare actual defaults of these deals for an extensive sample of 4,375 corporate debt securities underwritten during the period of the de facto softening of the Act’s restrictions. On average, securities underwritten by commercial banks’ subsidiaries have a higher probability of default than those underwritten by investment houses. Based on these results, it is not possible to reject that the repeal of the Glass-Stegall led to looser credit screening by broad (universal) banking companies. We also argue that a better understanding of the impact of commercial banks’ involvement on the securities business on the screening of all types of credit is warranted.

Keywords: Glass-Steagall Act, securities underwriting, default, investment banking

JEL Classification: G21, G24, N22