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affiliates.  In other words, the market discounted for the

greater likelihood of conflicts of interest when lending and

underwriting were both within the bank.  Although the affil-

iate and the bank were still connected--there were common

board members--and there was no mandated firewall protection

that could be enforced by the courts, the greater transpar-

ency and arm's-length structure of the affiliate provided

some improved credibility.

An important mechanism by which the affiliates gained

greater credibility appears to have been the use of indepen-

dent directors on the boards of affiliates.  Independent di-

rectors are individuals who are not officers or directors of

the parent commercial bank.  The public may perceive them as

less willing than insiders to accede to the pressure of

lending officers who might want risky loans repaid through

the sale of public securities.  A high proportion of inde-

pendent directors on the boards of affiliates did lead to

affiliates' being able to receive higher prices for their

securities, holding all other quality factors constant.  The

market rewarded banks with more credible structures with

higher prices.  Market pressures thus appear to have been

the key to determining the extent of the "independence" of

the subsidiaries' boards and the extent of the firewall sep-

arations.

Competitive market forces appear to propel banks to

adopt the structure that regulators would like to mandate.

The legal requirements of a regulation-mandated firewall

structure, however, are likely to be insufficiently flexible

to allow banks to adapt to ongoing changes in the financial

services market.  In addition, a specific regulatory mandate

does not permit the markets to explore a rich diversity of

organizational forms and commitment devices that could ef-

fectively address conflict-of-interest issues at the lowest

cost.

The evidence from the recent studies of the pre-Glass-

Steagall involvement of commercial banks in investment bank-

ing supports the repeal of Glass-Steagall.  Contrary to the

concerns of the act's defenders, investors were not system-

atically fooled by commercial banks and did not suffer loss-

es.  Investor concerns about the credibility of commercial

banks as underwriters led the banks to focus on higher grade

and better known securities.  Without regulatory pressure,

commercial banks adopted some form of separation between

their lending and underwriting operations consistent with

addressing investor concerns about their credibility.  To-