Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money. It was part of a broader set of regulations, known as the Banking Act of , that moved to restore confidence in the banking system after thousands of bank failures in the first years of the Depression.
The provisions prohibited banks from investing in risky securities, though they could invest in government bonds. The legislation was designed to lower the risk of failure in commercial banks and help safeguard customer accounts.
There is some quiet Wall Street support as well. I think their hope is that by forcing investment banks to separate from commercial banking, the investment banks would once again be free of prudential oversight by the Fed.
So, even if repeal did not drive the crisis, it certainly contributed to the need for bailouts of these behemoths. Another negative outcome of Glass-Steagall repeal, which is frequently overlooked, is the increase of political and market power by the mega-banks.
There is too-big-to-fail and then there is simply too big. Politicians, media, think tanks—all are influenced in one way or the other by these powerful financial institutions. And given their tremendous market influence, even large corporations can be fearful about taking them on.
You no longer have that dynamic. Risk-based rules do not work—they are static when risks are dynamic, subject to political influence and gaming by banks through their risk models. A 10 percent minimum leverage ratio—meaning that a mega-bank would have to fund itself with at least 10 percent equity and no more than 90 percent debt—would be the most effective thing we could do to stabilize our financial system and make sure that it is resilient during times of economic stress. Helen Garten, a former law professor at Rutgers University.
The rise of populism in both political parties and lingering anti-bank sentiment after the recession have fueled the movement to reinstate Glass-Steagall. Nostalgia is a factor as well. There is a perception that, back in the day of Glass-Steagall the s through the s , financial institutions were simpler and safer, protecting us from financial crises.
This perception is inaccurate, unfortunately. First, the wall between investment banking and commercial banking constructed by Glass-Steagall was crumbling as early as the s as a result of industry innovation and regulatory encouragement. By the time Glass-Steagall was finally repealed in the late s, banks were already in the securities business. Second, Glass-Steagall would not have prevented the financial crisis of Lehman and AIG were not part of diversified bank holding companies.
Excessive risk taking by banks occurred in mortgage lending and securitization, both permitted under Glass-Steagall. Finally, although the end of Glass-Steagall did facilitate some mergers between large banks and securities firms, consolidation in the banking industry and the resulting "too big to fail" problem was a serious regulatory concern long before the statute's repeal.
It's impossible to go back to The complexity and interconnectivity of our financial markets are a reality, and managing risk requires a more nuanced approach than simply restoring Glass-Steagall. Some new techniques are already in place, including enhanced capital and liquidity requirements.
The challenge for regulation is to find ways to improve banks' internal controls. One approach is to encourage large banks to simplify their complex and interconnected legal and business structures, which will facilitate regulatory oversight and enable more efficient resolution in the event of a failure of one or more units. Ironically, the result of simplification may be greater separation of different financial businesses within diversified banks, an internalized twist on the original Glass-Steagall model.
When Black Lives Matter calls for a restoration of the Glass-Steagall Act we know that the Act has exited the realm of policy and entered that of mythology. Ever since the tussles between Alexander Hamilton and Thomas Jefferson in the earliest days of the Republic, battles over the power of big banks have not fit neatly into a left-right frame.
Restoring Glass-Steagall, or something like it, was in both the Republican and Democratic platforms in Not necessarily. The Glass-Steagall wall between commercial and investment banking was originally supposed to prevent one of the many ways financial institutions could cheat unsuspecting small customers. There are plenty more of these ways, including new ones invented by the online financial industry.
The country has seesawed back and forth for many decades about financial regulation: crisis, regulation, no crisis, deregulation, crisis. More Posts by This Author. Businesses Pay for Loans?
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