Glass-Steagall Act
Encyclopedia
The Banking Act of 1933, , was a law that established the Federal Deposit Insurance Corporation
(FDIC) in the United States
and introduced banking reforms, some of which were designed to control speculation
. It is most commonly known as the Glass–Steagall Act, after its legislative sponsors, Senator Carter Glass
(D
–Va.) and Congressman Henry B. Steagall
(D–Ala.-3
).
Some provisions of the Act, such as Regulation Q
, which allowed the Federal Reserve to regulate interest rates in savings accounts, were repealed by the Depository Institutions Deregulation and Monetary Control Act
of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm–Leach–Bliley Act, named after its co-sponsors Phil Gramm
(R
, Texas), Rep.
Jim Leach
(R, Iowa
), and Rep. Thomas J. Bliley, Jr.
(R, Virginia
).
Senator
Carter Glass
of Lynchburg, Virginia
, a former Secretary of the Treasury
, and Democratic Congressman
Henry B. Steagall
of Alabama
, Chairman of the House Committee on Banking and Currency
.
The first Glass-Steagall Act
of 1932 was enacted in an effort to stop deflation, and expanded the Federal Reserve's ability to offer rediscount
s on more types of assets, such as government bonds as well as commercial paper
. The second Glass–Steagall Act (the Banking Act of 1933) was a reaction to the collapse of a large portion of the American commercial banking system in early 1933. Literature in economics usually refers to this latter act simply as the Glass–Steagall Act, since it had a stronger impact on US banking regulation.
and investment banking), and it founded the Federal Deposit Insurance Corporation
(FDIC) for insuring bank deposits. The FDIC law was an amendment to the Federal Reserve Act
, which was later withdrawn as part of this Glass–Steagall Act and Federal Reserve Act to become the Federal Deposit Insurance Act by decree in the Federal Deposit Insurance Act
of 1950.
"Rediscounting" is a way of providing financing to a bank or other financial institution. Especially in the 1800s and early 1900s, banks made loans to their customers by "discounting" their customers' notes
. Such a note is a paper document, in a specified form, in which the borrower promises to pay a certain amount at a specified, future date. For example, assume a customer wants to borrow $1000 for one year. In exchange for giving him $1000 today, the bank might ask him to sign a note promising to pay $1100 one year from now. The bank is "discounting" the note by giving the customer less than the note's $1100 face value. The extra $100 is the bank's compensation for providing the $1000 to the customer before the note matures
. The Federal Reserve System could provide financing to the bank by "rediscounting" this note, for example, by giving the bank $1050 in exchange for the note.
While most economic historians attribute the U.S. economic collapse to the economic problems which followed the Stock Market Crash of 1929, Austrian School economists attribute the collapse to gold-backed currency withdrawals by foreigners who had lost confidence in the dollar and by domestic depositors who feared the United States would go off the gold standard
, which it did when Roosevelt signed Executive Order 6102
, the Gold Confiscation Act of April 5, 1933.
According to a summary by the Congressional Research Service
of the Library of Congress
:
The bill that ultimately "repealed" the Act was brought up in the Senate by Phil Gramm
(R-Texas
) and in the House of Representatives by Jim Leach
(R-Iowa
) in 1999. The bills were passed by a Republican majority, basically following party lines by a 54–44 vote in the Senate and by a bi-partisan 343–86 vote in the House of Representatives
. After passing both the Senate and House the bill was moved to a conference committee to work out the differences between the Senate and House versions. The final bill resolving the differences was passed in the Senate 90–8 (one not voting) and in the House: 362–57 (15 not voting). The legislation was signed into law by President Bill Clinton
on November 12, 1999.
In reality, the repeal involved only one provision of the Act, the one preventing the same holding company from controlling both a commercial bank and an investment bank." Proponents argue that repealing this provision had little impact on the financial system and even helped restore stability during the financial crisis. Ten years after its repeal, detractors condemn Glass-Stegall's repeal for reestablishing conflict of interest within the financial industry and fostering "too big to fail
" institutions that led to the housing market collapse and its associated financial crisis.
The banking industry had been seeking the repeal of Glass–Steagall since at least the 1980s. In 1987 the Congressional Research Service prepared a report which explored the cases for and against preserving the Glass–Steagall act.
The argument for preserving Glass–Steagall (as written in 1987):
The argument against preserving the Act (as written in 1987):
, which was in 1999 the largest U.S. bank by assets, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations and establish so-called structured investment vehicles, or SIVs, that bought those securities. Elizabeth Warren
, author and one of the five outside experts who constitute the Congressional Oversight Panel of the Troubled Asset Relief Program, has said the repeal of this act contributed to the Global financial crisis of 2008–2009. Others have debated what role the repeal may have played in the financial crisis.
The year before the repeal, sub-prime loans were just five percent of all mortgage lending. By the time the credit crisis peaked in 2008, they were approaching 30 percent. This correlation is not necessarily an indication of causation, however, since there are several other significant events that have impacted the sub-prime market during that time. These include the adoption of mark-to-market accounting, implementation of the Basel Accords and the rise of adjustable rate mortgages.
of Arizona
and Democratic Senator Maria Cantwell
of Washington State jointly proposed re-enacting the Glass–Steagall Act, to re-impose the separation of commercial and investment banking that had been in effect from the original Act in 1933, to the time of its initial repeal in 1999. Legislation to re-enact parts of Glass–Steagall was also introduced into the House of Representatives. Banks such as Bank of America
have strongly opposed the proposed re-enactment.
On January 21, 2010, President Barack Obama
proposed bank regulations similar to some parts of Glass–Steagall in limiting the trading and investment capabilities of certain banks. The proposal was dubbed "The Volcker Rule
", for Paul Volcker
, who has been an outspoken advocate for the reimplementation of some aspects of Glass–Steagall and who appeared with Obama at the press conference in support of the proposed regulations. However, in May 2010, Volcker, in an interview with BBC
Business Editor Robert Peston
, said he was not advocating a return to Glass–Steagall or a complete separation between investment and commercial banking. In a May 2010 interview with Alternet
, economist Nouriel Roubini
described the "Volcker Rule" as insufficient and "essentially Glass–Steagall-Lite," allowing conflicts of interest to remain and for financial entities to continue to be "too big to fail
", a model he described as a disaster, and stated, "We need to go all the way and implement the kind of restrictions between commercial banking and investment banking that existed under Glass–Steagall."
In 2011 Representative Marcy Kaptur
(D-OH
) introduced H.R. 1489, the "Return to Prudent Banking Act of 2011", to repeal certain provisions of the Gramm–Leach–Bliley Act and revive the separation between commercial banking and the securities business, in the manner provided in the Banking Act of 1933, the so-called "Glass–Steagall Act".
In Mainland Europe, notably in France
, Germany
, and Italy
, an increasing number of think-tanks are calling for the adoption of stricter bank regulation
through new national and EU-wide legislations based on the Glass–Steagall Act.
Journalist Gretchen Morgenson
argues that the Dodd–Frank Act is not strong enough, arguing that it fails to protect consumers adequately, and, more importantly, fails to cut big and interconnected financial entities down to size.
Some think-tanks such as the CEE Council have argued that the dismantlement of the Glass–Steagall Act was only the symptom of a much deeper problem: the emergence of a new economic paradigm associating the worst interpretations of Keynesian monetary stimulus with unbridled deregulation that came to define the Clinton and Bush eras (1993–2009). In that perspective, they view the Dodd–Frank Act as insufficient, lacking the broad provisions necessary to restore financial orthodoxy and minimize conflicts of interests.
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
and introduced banking reforms, some of which were designed to control speculation
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
. It is most commonly known as the Glass–Steagall Act, after its legislative sponsors, Senator Carter Glass
Carter Glass
Carter Glass was a newspaper publisher and politician from Lynchburg, Virginia. He served many years in Congress as a member of the Democratic Party. As House co-sponsor, he played a central role in the development of the 1913 Glass-Owen Act that created the Federal Reserve System. Glass...
(D
Democratic Party (United States)
The Democratic Party is one of two major contemporary political parties in the United States, along with the Republican Party. The party's socially liberal and progressive platform is largely considered center-left in the U.S. political spectrum. The party has the lengthiest record of continuous...
–Va.) and Congressman Henry B. Steagall
Henry B. Steagall
Henry Bascom Steagall was a United States Representative from Alabama. He was chairman of the Committee on Banking and Currency and in 1933 co-sponsored the Glass–Steagall Act with Carter Glass, an act that introduced banking reforms and established the Federal Deposit Insurance Corporation ....
(D–Ala.-3
Alabama's 3rd congressional district
Alabama's 3rd congressional district is a U.S. congressional district in Alabama, which elects a representative to the United States House of Representatives. It encompasses Calhoun, Chambers, Cherokee, Clay, Cleburne, Lee, Macon, Randolph, Russell, Talladega, and Tallapoosa counties...
).
Some provisions of the Act, such as Regulation Q
Regulation Q
Regulation Q is Title 12, part 217 of the United States Code of Federal Regulations. It prohibits banks from paying interest on demand deposits in accordance with Section 11 of the Glass–Steagall Act ....
, which allowed the Federal Reserve to regulate interest rates in savings accounts, were repealed by the Depository Institutions Deregulation and Monetary Control Act
Depository Institutions Deregulation and Monetary Control Act
The Depository Institutions Deregulation and Monetary Control Act, a United States federal financial statute law passed in 1980, gave the Federal Reserve greater control over non-member banks.* It forced all banks to abide by the Fed's rules....
of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm–Leach–Bliley Act, named after its co-sponsors Phil Gramm
Phil Gramm
William Philip "Phil" Gramm is an American economist and politician, who has served as a Democratic Congressman , a Republican Congressman and a Republican Senator from Texas...
(R
Republican Party (United States)
The Republican Party is one of the two major contemporary political parties in the United States, along with the Democratic Party. Founded by anti-slavery expansion activists in 1854, it is often called the GOP . The party's platform generally reflects American conservatism in the U.S...
, Texas), Rep.
United States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
Jim Leach
Jim Leach
James Albert Smith "Jim" Leach is a former member of the U.S. House of Representatives from Iowa. In August 2009, he became Chairman of the National Endowment for the Humanities ....
(R, Iowa
Iowa's 2nd congressional district
Iowa's 2nd congressional district is a congressional district in the U.S. state of Iowa that generally covers most of the southeastern part of the state including Iowa City and Cedar Rapids.The district is currently represented by Democrat Dave Loebsack....
), and Rep. Thomas J. Bliley, Jr.
Thomas J. Bliley, Jr.
Thomas Jerome "Tom" Bliley, Jr. is a United States Republican politician and former U.S. Representative from the state of Virginia.-Background:...
(R, Virginia
Virginia's 7th congressional district
Virginia's Seventh Congressional District is a U.S. congressional district in the Commonwealth of Virginia. The district is currently represented by Republican Congressman Eric Cantor, the current House majority leader, first elected in 2000.-Voting:...
).
Background
Two separate United States laws are known as the Glass–Steagall Act. Both bills were sponsored by DemocraticDemocratic Party (United States)
The Democratic Party is one of two major contemporary political parties in the United States, along with the Republican Party. The party's socially liberal and progressive platform is largely considered center-left in the U.S. political spectrum. The party has the lengthiest record of continuous...
Senator
United States Senate
The United States Senate is the upper house of the bicameral legislature of the United States, and together with the United States House of Representatives comprises the United States Congress. The composition and powers of the Senate are established in Article One of the U.S. Constitution. Each...
Carter Glass
Carter Glass
Carter Glass was a newspaper publisher and politician from Lynchburg, Virginia. He served many years in Congress as a member of the Democratic Party. As House co-sponsor, he played a central role in the development of the 1913 Glass-Owen Act that created the Federal Reserve System. Glass...
of Lynchburg, Virginia
Lynchburg, Virginia
Lynchburg is an independent city in the Commonwealth of Virginia. The population was 75,568 as of 2010. Located in the foothills of the Blue Ridge Mountains along the banks of the James River, Lynchburg is known as the "City of Seven Hills" or "The Hill City." Lynchburg was the only major city in...
, a former Secretary of the Treasury
United States Secretary of the Treasury
The Secretary of the Treasury of the United States is the head of the United States Department of the Treasury, which is concerned with financial and monetary matters, and, until 2003, also with some issues of national security and defense. This position in the Federal Government of the United...
, and Democratic Congressman
United States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
Henry B. Steagall
Henry B. Steagall
Henry Bascom Steagall was a United States Representative from Alabama. He was chairman of the Committee on Banking and Currency and in 1933 co-sponsored the Glass–Steagall Act with Carter Glass, an act that introduced banking reforms and established the Federal Deposit Insurance Corporation ....
of Alabama
Alabama
Alabama is a state located in the southeastern region of the United States. It is bordered by Tennessee to the north, Georgia to the east, Florida and the Gulf of Mexico to the south, and Mississippi to the west. Alabama ranks 30th in total land area and ranks second in the size of its inland...
, Chairman of the House Committee on Banking and Currency
United States House Committee on Financial Services
The United States House Committee on Financial Services is the committee of the United States House of Representatives that oversees the entire financial services industry, including the securities, insurance, banking, and housing industries...
.
The first Glass-Steagall Act
Glass-Steagall Act
The Banking Act of 1933, , was a law that established the Federal Deposit Insurance Corporation in the United States and introduced banking reforms, some of which were designed to control speculation. It is most commonly known as the Glass–Steagall Act, after its legislative sponsors, Senator...
of 1932 was enacted in an effort to stop deflation, and expanded the Federal Reserve's ability to offer rediscount
Rediscount
Rediscount is a way of providing financing to a bank or other financial institution. Especially in the 19th century and early 20th century banks made loans to their customers by "discounting" the customer's note. The note is a paper document, in a specified form, where the borrower promises to...
s on more types of assets, such as government bonds as well as commercial paper
Commercial paper
In the global money market, commercial paper is an unsecured promissory note with a fixed maturity of 1 to 270 days. Commercial Paper is a money-market security issued by large banks and corporations to get money to meet short term debt obligations , and is only backed by an issuing bank or...
. The second Glass–Steagall Act (the Banking Act of 1933) was a reaction to the collapse of a large portion of the American commercial banking system in early 1933. Literature in economics usually refers to this latter act simply as the Glass–Steagall Act, since it had a stronger impact on US banking regulation.
Overview
The act introduced the separation of the bank types according to their business (commercialCommercial bank
After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...
and investment banking), and it founded the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC) for insuring bank deposits. The FDIC law was an amendment to the Federal Reserve Act
Federal Reserve Act
The Federal Reserve Act is an Act of Congress that created and set up the Federal Reserve System, the central banking system of the United States of America, and granted it the legal authority to issue Federal Reserve Notes and Federal Reserve Bank Notes as legal tender...
, which was later withdrawn as part of this Glass–Steagall Act and Federal Reserve Act to become the Federal Deposit Insurance Act by decree in the Federal Deposit Insurance Act
Federal Deposit Insurance Act
The Federal Deposit Insurance Act of 1950, , formally removed section 12B of the Federal Reserve Act of 1913 creating the Federal Deposit Insurance Corporation , which itself was an amendment by the Banking Act of 1933, and put it into its own act called the Federal Deposit Insurance Act, which has...
of 1950.
"Rediscounting" is a way of providing financing to a bank or other financial institution. Especially in the 1800s and early 1900s, banks made loans to their customers by "discounting" their customers' notes
Promissory note
A promissory note is a negotiable instrument, wherein one party makes an unconditional promise in writing to pay a determinate sum of money to the other , either at a fixed or determinable future time or on demand of the payee, under specific terms.Referred to as a note payable in accounting, or...
. Such a note is a paper document, in a specified form, in which the borrower promises to pay a certain amount at a specified, future date. For example, assume a customer wants to borrow $1000 for one year. In exchange for giving him $1000 today, the bank might ask him to sign a note promising to pay $1100 one year from now. The bank is "discounting" the note by giving the customer less than the note's $1100 face value. The extra $100 is the bank's compensation for providing the $1000 to the customer before the note matures
Maturity (finance)
In finance, maturity or maturity date refers to the final payment date of a loan or other financial instrument, at which point the principal is due to be paid....
. The Federal Reserve System could provide financing to the bank by "rediscounting" this note, for example, by giving the bank $1050 in exchange for the note.
While most economic historians attribute the U.S. economic collapse to the economic problems which followed the Stock Market Crash of 1929, Austrian School economists attribute the collapse to gold-backed currency withdrawals by foreigners who had lost confidence in the dollar and by domestic depositors who feared the United States would go off the gold standard
Gold standard
The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...
, which it did when Roosevelt signed Executive Order 6102
Executive Order 6102
Executive Order 6102 is an Executive Order signed on April 5, 1933, by U.S. President Franklin D. Roosevelt "forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates within the continental United States"...
, the Gold Confiscation Act of April 5, 1933.
According to a summary by the Congressional Research Service
Congressional Research Service
The Congressional Research Service , known as "Congress's think tank", is the public policy research arm of the United States Congress. As a legislative branch agency within the Library of Congress, CRS works exclusively and directly for Members of Congress, their Committees and staff on a...
of the Library of Congress
Library of Congress
The Library of Congress is the research library of the United States Congress, de facto national library of the United States, and the oldest federal cultural institution in the United States. Located in three buildings in Washington, D.C., it is the largest library in the world by shelf space and...
:
Repeal
- See also Depository Institutions Deregulation and Monetary Control ActDepository Institutions Deregulation and Monetary Control ActThe Depository Institutions Deregulation and Monetary Control Act, a United States federal financial statute law passed in 1980, gave the Federal Reserve greater control over non-member banks.* It forced all banks to abide by the Fed's rules....
of 1980, the Garn–St. Germain Depository Institutions Act of 1982, and the Gramm–Leach–Bliley Act of 1999.
The bill that ultimately "repealed" the Act was brought up in the Senate by Phil Gramm
Phil Gramm
William Philip "Phil" Gramm is an American economist and politician, who has served as a Democratic Congressman , a Republican Congressman and a Republican Senator from Texas...
(R-Texas
Texas
Texas is the second largest U.S. state by both area and population, and the largest state by area in the contiguous United States.The name, based on the Caddo word "Tejas" meaning "friends" or "allies", was applied by the Spanish to the Caddo themselves and to the region of their settlement in...
) and in the House of Representatives by Jim Leach
Jim Leach
James Albert Smith "Jim" Leach is a former member of the U.S. House of Representatives from Iowa. In August 2009, he became Chairman of the National Endowment for the Humanities ....
(R-Iowa
Iowa
Iowa is a state located in the Midwestern United States, an area often referred to as the "American Heartland". It derives its name from the Ioway people, one of the many American Indian tribes that occupied the state at the time of European exploration. Iowa was a part of the French colony of New...
) in 1999. The bills were passed by a Republican majority, basically following party lines by a 54–44 vote in the Senate and by a bi-partisan 343–86 vote in the House of Representatives
United States House of Representatives
The United States House of Representatives is one of the two Houses of the United States Congress, the bicameral legislature which also includes the Senate.The composition and powers of the House are established in Article One of the Constitution...
. After passing both the Senate and House the bill was moved to a conference committee to work out the differences between the Senate and House versions. The final bill resolving the differences was passed in the Senate 90–8 (one not voting) and in the House: 362–57 (15 not voting). The legislation was signed into law by President Bill Clinton
Bill Clinton
William Jefferson "Bill" Clinton is an American politician who served as the 42nd President of the United States from 1993 to 2001. Inaugurated at age 46, he was the third-youngest president. He took office at the end of the Cold War, and was the first president of the baby boomer generation...
on November 12, 1999.
In reality, the repeal involved only one provision of the Act, the one preventing the same holding company from controlling both a commercial bank and an investment bank." Proponents argue that repealing this provision had little impact on the financial system and even helped restore stability during the financial crisis. Ten years after its repeal, detractors condemn Glass-Stegall's repeal for reestablishing conflict of interest within the financial industry and fostering "too big to fail
Too Big to Fail
Too Big to Fail is a television drama film in the United States broadcast on HBO on May 23, 2011. It is based on the non-fiction book Too Big to Fail by Andrew Ross Sorkin. The TV film was directed by Curtis Hanson...
" institutions that led to the housing market collapse and its associated financial crisis.
The banking industry had been seeking the repeal of Glass–Steagall since at least the 1980s. In 1987 the Congressional Research Service prepared a report which explored the cases for and against preserving the Glass–Steagall act.
The argument for preserving Glass–Steagall (as written in 1987):
- Conflicts of interest characterize the granting of credit (that is to say, lending) and the use of credit (that is to say, investing) by the same entity, which led to abuses that originally produced the Act.
- Depository institutions possess enormous financial power, by virtue of their control of other people's money; its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments.
- Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.
- Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of real estate investment trusts sponsored by bank holding companies (in the 1970s and 1980s).
The argument against preserving the Act (as written in 1987):
- Depository institutions will now operate in "deregulated" financial markets in which distinctions between loans, securities, and deposits are not well drawn. They are losing market shares to securities firms that are not so strictly regulated, and to foreign financial institutions operating without much restriction from the Act.
- Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms.
- The securities activities that depository institutions are seeking are both low-risk by their very nature and would reduce the total risk of organizations offering them – by diversification.
- In much of the rest of the world, depository institutions operate simultaneously and successfully in both banking and securities markets. Lessons learned from their experience can be applied to our national financial structure and regulation.
Events following repeal
The repeal enabled commercial lenders such as CitigroupCitigroup
Citigroup Inc. or Citi is an American multinational financial services corporation headquartered in Manhattan, New York City, New York, United States. Citigroup was formed from one of the world's largest mergers in history by combining the banking giant Citicorp and financial conglomerate...
, which was in 1999 the largest U.S. bank by assets, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations and establish so-called structured investment vehicles, or SIVs, that bought those securities. Elizabeth Warren
Elizabeth Warren
Elizabeth Warren is an American bankruptcy expert, policy advocate, Harvard Law School professor, and Democratic Party candidate in the 2012 United States Senate election in Massachusetts. She has written several academic and popular books concerning the American economy and personal finance. She...
, author and one of the five outside experts who constitute the Congressional Oversight Panel of the Troubled Asset Relief Program, has said the repeal of this act contributed to the Global financial crisis of 2008–2009. Others have debated what role the repeal may have played in the financial crisis.
The year before the repeal, sub-prime loans were just five percent of all mortgage lending. By the time the credit crisis peaked in 2008, they were approaching 30 percent. This correlation is not necessarily an indication of causation, however, since there are several other significant events that have impacted the sub-prime market during that time. These include the adoption of mark-to-market accounting, implementation of the Basel Accords and the rise of adjustable rate mortgages.
Proposed re-enactment
In mid-December 2009, Republican Senator John McCainJohn McCain
John Sidney McCain III is the senior United States Senator from Arizona. He was the Republican nominee for president in the 2008 United States election....
of Arizona
Arizona
Arizona ; is a state located in the southwestern region of the United States. It is also part of the western United States and the mountain west. The capital and largest city is Phoenix...
and Democratic Senator Maria Cantwell
Maria Cantwell
Maria E. Cantwell is the junior United States Senator from the state of Washington and a member of the Democratic Party....
of Washington State jointly proposed re-enacting the Glass–Steagall Act, to re-impose the separation of commercial and investment banking that had been in effect from the original Act in 1933, to the time of its initial repeal in 1999. Legislation to re-enact parts of Glass–Steagall was also introduced into the House of Representatives. Banks such as Bank of America
Bank of America
Bank of America Corporation, an American multinational banking and financial services corporation, is the second largest bank holding company in the United States by assets, and the fourth largest bank in the U.S. by market capitalization. The bank is headquartered in Charlotte, North Carolina...
have strongly opposed the proposed re-enactment.
On January 21, 2010, President Barack Obama
Barack Obama
Barack Hussein Obama II is the 44th and current President of the United States. He is the first African American to hold the office. Obama previously served as a United States Senator from Illinois, from January 2005 until he resigned following his victory in the 2008 presidential election.Born in...
proposed bank regulations similar to some parts of Glass–Steagall in limiting the trading and investment capabilities of certain banks. The proposal was dubbed "The Volcker Rule
Volcker Rule
The Volcker Rule is a specific section of the Dodd–Frank Wall Street Reform and Consumer Protection Act originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker to restrict United States banks from making certain kinds of speculative investments that...
", for Paul Volcker
Paul Volcker
Paul Adolph Volcker, Jr. is an American economist. He was the Chairman of the Federal Reserve under United States Presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987. He is widely credited with ending the high levels of inflation seen in the United States in the 1970s and...
, who has been an outspoken advocate for the reimplementation of some aspects of Glass–Steagall and who appeared with Obama at the press conference in support of the proposed regulations. However, in May 2010, Volcker, in an interview with BBC
BBC
The British Broadcasting Corporation is a British public service broadcaster. Its headquarters is at Broadcasting House in the City of Westminster, London. It is the largest broadcaster in the world, with about 23,000 staff...
Business Editor Robert Peston
Robert Peston
Robert Peston is a British journalist. Since February 2006, he has been the Business Editor for BBC News. He became known to a wider public with his reporting of the late-2000s financial crisis, especially with his scoop on the Northern Rock crisis.-Early life and education:Peston is the son of...
, said he was not advocating a return to Glass–Steagall or a complete separation between investment and commercial banking. In a May 2010 interview with Alternet
AlterNet
AlterNet, a project of the non-profit Independent Media Institute, is a progressive/liberal activist news service. Launched in 1998, AlterNet now claims a readership of over 3 million visitors per month .AlterNet publishes original content as well as journalism from a wide variety of other sources...
, economist Nouriel Roubini
Nouriel Roubini
Nouriel Roubini is an American economist. He claims to have predicted both the collapse of the United States housing market and the worldwide recession which started in 2008. He teaches at New York University's Stern School of Business and is the chairman of Roubini Global Economics, an economic...
described the "Volcker Rule" as insufficient and "essentially Glass–Steagall-Lite," allowing conflicts of interest to remain and for financial entities to continue to be "too big to fail
Too Big to Fail
Too Big to Fail is a television drama film in the United States broadcast on HBO on May 23, 2011. It is based on the non-fiction book Too Big to Fail by Andrew Ross Sorkin. The TV film was directed by Curtis Hanson...
", a model he described as a disaster, and stated, "We need to go all the way and implement the kind of restrictions between commercial banking and investment banking that existed under Glass–Steagall."
In 2011 Representative Marcy Kaptur
Marcy Kaptur
Marcia Carolyn "Marcy" Kaptur is the U.S. Representative for , serving since 1983. She is a member of the Democratic Party. The district, anchored by the city of Toledo, includes all of Ottawa and Erie counties, and part of Lucas and Lorain counties.Serving her fourteenth term in the House of...
(D-OH
Ohio
Ohio is a Midwestern state in the United States. The 34th largest state by area in the U.S.,it is the 7th‑most populous with over 11.5 million residents, containing several major American cities and seven metropolitan areas with populations of 500,000 or more.The state's capital is Columbus...
) introduced H.R. 1489, the "Return to Prudent Banking Act of 2011", to repeal certain provisions of the Gramm–Leach–Bliley Act and revive the separation between commercial banking and the securities business, in the manner provided in the Banking Act of 1933, the so-called "Glass–Steagall Act".
In Mainland Europe, notably in France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
, and Italy
Italy
Italy , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
, an increasing number of think-tanks are calling for the adoption of stricter bank regulation
Bank regulation
Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines. This regulatory structure creates transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things...
through new national and EU-wide legislations based on the Glass–Steagall Act.
Glass-Steagall and the Dodd–Frank Act
The Dodd–Frank Wall Street Reform and Consumer Protection Act (Pub.L. 111-203, H.R. 4173) is a federal statute in the United States that was signed into law by President Barack Obama on July 21, 2010. The Act is a product of the financial regulatory reform agenda of the 111th United States Congress and the Obama administration.Journalist Gretchen Morgenson
Gretchen Morgenson
Gretchen C. Morgenson is a Pulitzer Prize-winning journalist who writes the Market Watch column for the Sunday "Money & Business" section of the New York Times.-Life:...
argues that the Dodd–Frank Act is not strong enough, arguing that it fails to protect consumers adequately, and, more importantly, fails to cut big and interconnected financial entities down to size.
Some think-tanks such as the CEE Council have argued that the dismantlement of the Glass–Steagall Act was only the symptom of a much deeper problem: the emergence of a new economic paradigm associating the worst interpretations of Keynesian monetary stimulus with unbridled deregulation that came to define the Clinton and Bush eras (1993–2009). In that perspective, they view the Dodd–Frank Act as insufficient, lacking the broad provisions necessary to restore financial orthodoxy and minimize conflicts of interests.
See also
- American International GroupAmerican International GroupAmerican International Group, Inc. or AIG is an American multinational insurance corporation. Its corporate headquarters is located in the American International Building in New York City. The British headquarters office is on Fenchurch Street in London, continental Europe operations are based in...
- Arthur Vandenberg
- Commodity Futures Modernization Act of 2000Commodity Futures Modernization Act of 2000The Commodity Futures Modernization Act of 2000 is United States federal legislation that officially ensured the deregulation of financial products known as over-the-counter derivatives. It was signed into law on December 21, 2000 by President Bill Clinton...
- Corporate LawCorporate lawCorporate law is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another. Corporate law is a part of a broader companies law...
- Global financial crisis of 2008
- Subprime mortgage crisisSubprime mortgage crisisThe U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....
- Systemic riskSystemic riskIn finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system. It can be defined as "financial system instability, potentially catastrophic, caused or exacerbated by...