Glass–Steagall legislation

Wall Street crash of 1929
Foundations

The Glass–Steagall legislation describes four provisions of the United States Banking Act of 1933 separating commercial and investment banking.[1] The article 1933 Banking Act describes the entire law, including the legislative history of the provisions covered.

As with the Glass–Steagall Act of 1932, the common name comes from the names of the Congressional sponsors, Senator Carter Glass and Representative Henry B. Steagall.[2]

The separation of commercial and investment banking prevented securities firms and investment banks from taking deposits and commercial Federal Reserve member banks from:

  • dealing in non-governmental securities for customers;
  • investing in non-investment grade securities for themselves;
  • underwriting or distributing non-governmental securities;
  • affiliating (or sharing employees) with companies involved in such activities.

Starting in the early 1960s, federal banking regulators' interpretations of the Act permitted commercial banks, and especially commercial bank affiliates, to engage in an expanding list and volume of securities activities.[3] Congressional efforts to "repeal the Glass–Steagall Act", referring to those four provisions (and then usually to only the two provisions that restricted affiliations between commercial banks and securities firms),[4] culminated in the 1999 Gramm–Leach–Bliley Act (GLBA), which repealed the two provisions restricting affiliations between banks and securities firms.[5]

By that time, many commentators argued Glass–Steagall was already "dead".[6] Most notably, Citibank's 1998 affiliation with Salomon Smith Barney, one of the largest U.S. securities firms, was permitted under the Federal Reserve Board's then existing interpretation of the Glass–Steagall Act.[7] In November 1999, President Bill Clinton publicly declared "the Glass–Steagall law is no longer appropriate".[8][9]

Some commentators have stated that the GLBA's repeal of the affiliation restrictions of the Glass–Steagall Act was an important cause of the 2008 financial crisis. Nobel Memorial Prize in Economics laureate Joseph Stiglitz argued that the effect of the repeal was "indirect": "[w]hen repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top".[10][11] Economists at the Federal Reserve, such as Chairman Ben Bernanke, have argued that the activities linked to the 2008 financial crisis were not prohibited (or, in most cases, even regulated) by the Glass–Steagall Act.[12][13][14]

  1. ^ CRS 2010a, pp. 1 and 5. Wilmarth 1990, p. 1161.
  2. ^ Wilmarth 2008, p. 560.
  3. ^ Cite error: The named reference uphold was invoked but never defined (see the help page).
  4. ^ Cite error: The named reference repeal was invoked but never defined (see the help page).
  5. ^ Cite error: The named reference GLBA was invoked but never defined (see the help page).
  6. ^ Cite error: The named reference dead was invoked but never defined (see the help page).
  7. ^ Cite error: The named reference Citi was invoked but never defined (see the help page).
  8. ^ "Money, power, and Wall Street: Transcript, Part 4, (quoted as "The Glass–Steagall law is no longer appropriate—")". April 24 and May 1, 2012; encore performance July 3, 2012. PBS. Retrieved October 8, 2012. Transcript of Clinton remarks at Financial Modernization bill signing, Washington, D.C.: U.S. Newswire, November 12, 1999, It is true that the Glass-Steagall law is no longer appropriate to the economy in which we lived. It worked pretty well for the industrial economy, which was highly organized, much more centralized and much more nationalized than the one in which we operate today. But the world is very different.
  9. ^ "Statement on Signing the Gramm-Leach-Bliley Act". The University of California, Santa Barbara – The American Presidency Project. November 12, 1999. Archived from the original on February 7, 2016. Retrieved April 6, 2017.
  10. ^ Cite error: The named reference Kuttner was invoked but never defined (see the help page).
  11. ^ Stiglitz, Joseph E. (9 December 2008). "Joseph E. Stiglitz on capitalist fools". Vanity Fair. Retrieved 2016-09-11.
  12. ^ Cite error: The named reference W&M was invoked but never defined (see the help page).
  13. ^ "FRB: Speech--Bernanke, Monetary Policy and the Housing Bubble--January 3, 2010". www.federalreserve.gov. Retrieved 2016-09-11.
  14. ^ Mester, Loretta J. "Optimal industrial structure in banking." (2005).
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