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The GLASS–STEAGALL LEGISLATION describes four provisions of the U.S. Banking Act of 1933 separating commercial and investment banking. The article 1933 Banking Act describes the entire law, including the legislative history of the provisions covered here.

(The common name comes from the names of the Congressional sponsors, Senator Carter Glass and Representative Henry B. Steagall . A separate 1932 law described in the article Glass–Steagall Act of 1932 , had the same sponsors, and is also referred to as the Glass–Steagall Act.)

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. 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between commercial banks and securities firms), culminated in the 1999 Gramm–Leach–Bliley Act (GLBA), which repealed the two provisions restricting affiliations between banks and securities firms.

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

Some commentators have stated that the GLBA's repeal of the affiliation restrictions of the Glass–Steagall Act was an important cause of the financial crisis of 2007–2008 . Economics Nobel prize laureate Joseph Stiglitz, for instance, argued that "hen repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top" Economists at the Federal Reserve, such as Chairman of the Fed Ben Bernanke, have argued that the activities linked to the financial crisis were not prohibited (or, in most cases, even regulated) by the Glass–Steagall Act.

CONTENTS

* 1 Sponsors * 2 Legislative history * 3 Separating commercial and investment banking * 4 Decline and repeal * 5 Aftermath of repeal * 6 Post-financial crisis reform debate * 7 See also * 8 Notes * 9 References * 10 Further reading * 11 External links

SPONSORS

Sen. Carter Glass (D –Va. ) and Rep. Henry B. Steagall (D –Ala.-3 ), the co-sponsors of the Glass–Steagall Act.

The sponsors of both the Banking Act of 1933 and the Glass–Steagall Act of 1932 were southern Democrats : Senator Carter Glass of Virginia (who in 1932 had been in the House, Secretary of the Treasury, or in the Senate, for the preceding 30 years), and Representative Henry B. Steagall of Alabama (who had been in the House for the preceding 17 years).

LEGISLATIVE HISTORY

Main article: 1933 Banking Act

Between 1930 and 1932 Senator Carter Glass (D-VA) introduced several versions of a bill (known in each version as the Glass bill) to regulate or prohibit the combination of commercial and investment banking and to establish other reforms (except deposit insurance) similar to the final provisions of the 1933 Banking Act. On June 16, 1933, President Roosevelt signed the bill into law. Glass originally introduced his banking reform bill in January 1932. It received extensive critiques and comments from bankers, economists, and the Federal Reserve Board. It passed the Senate in February 1932, but the House adjourned before coming to a decision. The Senate passed a version of the Glass bill that would have required commercial banks to eliminate their securities affiliates.

The final Glass–Steagall provisions contained in the 1933 Banking Act reduced from five years to one year the period in which commercial banks were required to eliminate such affiliations. Although the deposit insurance provisions of the 1933 Banking Act were very controversial, and drew veto threats from President Franklin Delano Roosevelt , President Roosevelt supported the Glass–Steagall provisions separating commercial and investment banking, and Representative Steagall included those provisions in his House bill that differed from Senator Glass's Senate bill primarily in its deposit insurance provisions. Steagall insisted on protecting small banks while Glass felt that small banks were the weakness to U.S. banking.

Many accounts of the Act identify the Pecora Investigation as important in leading to the Act, particularly its Glass–Steagall provisions, becoming law. While supporters of the Glass–Steagall separation of commercial and investment banking cite the Pecora Investigation as supporting that separation, Glass–Steagall critics have argued that the evidence from the Pecora Investigation did not support the separation of commercial and investment banking.

This source states that Senator Glass proposed many versions of his bill to Congress known as the Glass Bills in the two years prior to the Glass–Steagall Act being passed. It also includes how the deposit insurance provisions of the bill were very controversial at the time, which almost led to the rejection of the bill once again.

The previous Glass Bills before the final revision all had similar goals and brought up the same objectives which were to separate commercial from investment banking, bring more banking activities under Federal Reserve supervision and to allow branch banking. In May 1933 Steagall's addition of allowing state chartered banks to receive federal deposit insurance and shortening the time in which banks needed to eliminate securities affiliates to one year was known as the driving force of what helped the Glass–Steagall act to be signed into law.

SEPARATING COMMERCIAL AND INVESTMENT BANKING

Main article: Glass–Steagall: legislation, limits and loopholes

The Glass–Steagall separation of commercial and investment banking was in four sections of the 1933 Banking Act (sections 16, 20, 21, and 32). The Banking Act of 1935 clarified the 1933 legislation and resolved inconsistencies in it. Together, they prevented 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

Conversely, Glass–Steagall prevented securities firms and investment banks from taking deposits.

The law gave banks one year after the law was passed on June 16, 1933 to decide whether they would be a commercial bank or an investment bank. Only 10 percent of a commercial bank's income could stem from securities. One exception to this rule was that commercial banks could underwrite government-issued bonds.

There were several "loopholes" that regulators and financial firms were able to exploit during the lifetime of Glass–Steagall restrictions. Aside from the Section 21 prohibition on securities firms taking deposits, neither savings and loans nor state-chartered banks that did not belong to the Federal Reserve System were restricted by Glass–Steagall. Glass–Steagall also did not prevent securities firms from owning such institutions. S however, it was not the cause of the financial crisis.

Other commentators believed that these banking changes had no effect, and the financial crisis would have happened the same way if the regulations had still been in force. Lawrence J. White , for instance, noted that "it was not investment banking activities, such as underwriting and dealing in securities, that did them in".

At the time of the repeal, most commentators believed it would be harmless. Because the Federal Reserve's interpretations of the act had already weakened restrictions previously in place, commentators did not find much significance in the repeal, especially of sections 20 and 32. Instead, the five year anniversary of its repeal was marked by numerous sources explaining that the GLBA had not significantly changed the market structure of the banking and securities industries. More significant changes had occurred during the 1990s when commercial banking firms had gained a significant role in securities markets through "Section 20 affiliates".

POST-FINANCIAL CRISIS REFORM DEBATE

Main article: Glass–Steagall in post-financial crisis reform debate

Following the financial crisis of 2007-2008, legislators unsuccessfully tried to reinstate Glass–Steagall Sections 20 and 32 as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act . Both in the United States and elsewhere, banking reforms have been proposed that refer to Glass–Steagall principles. These proposals include issues of “ring fencing” commercial banking operations and narrow banking proposals that would sharply reduce the permitted activities of commercial banks.

SEE ALSO

* American International Group * Arthur H. Vandenberg
Arthur H. Vandenberg
* Commodity Futures Modernization Act of 2000 * Corporate law * Decline of the Glass–Steagall Act * Subprime mortgage crisis
Subprime mortgage crisis
* Systemic risk

NOTES

* ^ _A_ _B_ CRS 2010a , pp. 1 and 5. Wilmarth 1990, p. 1161. * ^ Wilmarth 2008, p. 560. * ^ CRS 2010a , p. 10 * ^ Reinicke 1995, pp. 104-105. Greenspan 1987, pp. 3 and 15-22. FRB 1998 . * ^ Macey 2000, p. 716. Wilmarth 2002, p. 219, fn. 5. * ^ Wilmarth 2002, pp. 220 and 222. Macey 2000, pp. 691-692 and 716-718. Lockner and Hansche 2000, p. 37. * ^ Simpson Thacher 1998, pp. 1-6. Lockner and Hansche 2000, p. 37. Macey 2000, p. 718. * ^ "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
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. * ^ "Statement on Signing the Gramm-Leach-Bliley Act". _The University of California, Santa Barbara – The American Presidency Project_. November 12, 1999. * ^ Kuttner, Robert (October 2, 2007), "The Alarming Parallels Between 1929 and 2007", _The American Prospect _: 2, retrieved February 20, 2012 . * ^ _A_ _B_ Stiglitz, Joseph E. "Joseph E. Stiglitz on capitalist fools". Retrieved 2016-09-11. * ^ White, Lawrence J. (2010), "The Gramm-Leach-Bliley Act of 1999: A Bridge Too Far? Or Not Far Enough?" (PDF), _Suffolk University Law Review_, 43 (4): 938 and 943–946, retrieved February 20, 2012 . Markham, Jerry W. (2010), "The Subprime Crisis—A Test Match For The Bankers: Glass–Steagall vs. Gramm-Leach-Bliley" (PDF), _University of Pennsylvania Journal of Business Law_, 12 (4): 1092–1134, retrieved February 20, 2012 . * ^ "FRB: Speech--Bernanke, Monetary Policy and the Housing Bubble--January 3, 2010". _www.federalreserve.gov_. Retrieved 2016-09-11. * ^ _A_ _B_ Mester, Loretta J. "Optimal industrial structure in banking." (2005). * ^ Kennedy 1973, pp. 50-53 and 203-204. Perkins 1971, pp. 497-505. * ^ Kennedy 1973, pp. 72-73. * ^ Patrick 1993, pp. 172-174. Kelly III 1985, p. 54, fn. 171. Perkins 1971, p. 524. * ^ Patrick 1993, pp. 168-172. Burns 1974, pp. 41-42 and 79. Kennedy 1973, pp. 212-219. * ^ Kennedy 1973, pp. 103-128 and 204-205. Burns 1974, p 78. * ^ Perino 2010 * ^ Bentson 1990, pp. 47-89. Cleveland and Huertas 1985, pp. 172-187. * ^ "Banking Act of 1933, commonly called Glass-Steagall". * ^ "Financial Services Modernization Act of 1999, commonly called Gramm-Leach-Bliley". * ^ Krugman, Paul (2015-10-16). "Democrats, Republicans and Wall Street Tycoons". _The New York Times_. ISSN 0362-4331 . Retrieved 2016-09-11. * ^ _Gramm-Leach-Bliley Did Not Cause the Financial Crisis_ (PDF), American Bankers Association , January 2010, retrieved July 13, 2012 . _Who Caused the Economic Crisis?_, FactCheck .org, October 1, 2008, retrieved February 20, 2012 Bartiromo, Maria (September 23, 2008), " Bill Clinton
Bill Clinton
on the banking crisis, McCain, and Hillary", _Bloomberg Businessweek Magazine_, retrieved October 11, 2012 * ^ White, Lawrence J. (2010), "The Gramm-Leach-Bliley Act of 1999: A Bridge Too Far? Or Not Far Enough?" (PDF), _Suffolk University Law Review_, 43 (4): 938 and 943–946, retrieved February 20, 2012 .

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* Anderson, Benjamin (1949), Economics and the Public Welfare_, New York: D. Van Nostrand Company . * Barth, James R.; Brumbaugh, R. Dan, Jr. & Wilcox, James A. (2000), "Policy Watch: The Repeal of Glass–Steagall and the Advent of Broad Banking", _ Journal of Economic Perspectives _, 14 (2): 191–204, JSTOR 2647102 , doi :10.1257/jep.14.2.191 . * Blass, Asher A.; Grossman, Richard S. (1998), "Who Needs Glass–Steagall? Evidence From Israel’s Bank Share Crisis and the Great Depression", _Contemporary Economic Policy_, 16 (2): 185–196, doi :10.1111/j.1465-7287.1998.tb00511.x , retrieved February 27, 2012 . * Burns, Arthur F. (1988), _The Ongoing Revolution in American Banking_, Washington, D.C.: American Enterprise Institute, ISBN 0-8447-3654-6 . * Calomiris, Charles W.; White, Eugene N. (1994), "The Origins of Federal Deposit Insurance, chapter 5 in The Regulated Economy: A Historical Approach to Political Economy, edited by Claudia Golden and Gary D. Libecap" (PDF), _Journal of Comparative Business and Capital Market Law_, 5 (2): 137–193, retrieved February 27, 2012 . * Calomiris, Charles W. (2000), _ U.S. Bank Deregulation in Historical Perspective_, New York: Cambridge University Press, ISBN 0-521-58362-4 * Canals, Jordi (1997), _Universal Banking: International Comparisons and Theoretical Perspectives_, Oxford; New York: Clarendon Press, ISBN 0-19-877506-7 . * Coggins, Bruce (1998), _Does Financial Deregulation Work? A Critique of Free Market Approaches_, New Directions in Modern Economics, Northampton, MA: Edward Elgar Publishing Limited, ISBN 1-85898-638-9 . * Firzli, M. Nicolas (January 2010), "Bank Regulation and Financial Orthodoxy: the Lessons from the Glass–Steagall Act", _Revue Analyse Financière_ (in French): 49–52 . * Hambley, Winthrop P. (September 1999), "The Great Debate-What will become of financial modernization", _Community Investments_, Federal Reserve Bank of San Francisco , 11 (2): 1–3, retrieved February 16, 2012 . * Huertas, Thomas (1983), "Chapter 1: The Regulation of Financial Institutions: A Historical Perspective on Current Issues", in Benston, George J., _Financial Services: The Changing Institutions and Government Policy_, Englewood Cliffs, N.J.: Prentice-Hall, ISBN 0-13-316513-2 . * Kroszner, Randall S. & Rajan, Raghuram G. (1994), "Is the Glass–Steagall Act Justified? A Study of the U.S. Experience with Universal Banking Before 1933", _ American Economic Review _, 84 (4): 810–832, JSTOR 2118032 . * Lewis, Toby (January 22, 2010), "New Glass–Steagall Will Shake Private Equity", _ Financial News _ . * Mester, Loretta J. (1996), "Repealing Glass–Steagall: The Past Points the Way to the Future", _Federal Reserve Bank of Philadelphia Business Review_ (July/August), retrieved February 25, 2012 . * Minsky, Hyman (1982), _Can_ It _Happen Again?_, Armonk, N.Y.: M.E. Sharpe, ISBN 0-873-32213-4 . * Mishkin, Frederic S. (2006), "How Big a Problem is Too Big to Fail? A Review of Gary Stern and Ron Feldman’s _Too Big to Fail: The Hazards of Bank Bailouts_" (PDF), _Journal of Economic Literature_, 44 (December): 988–1004, doi :10.1257/jel.44.4.988 , archived from the original (PDF) on August 21, 2014, retrieved February 25, 2012 . * Pecora, Ferdinand (1939), "Wall Street Under Oath: The Story of Our Modern Money Changers", _(reprint of 1939 edition pubslished by Simon &Schuster, New York )_, Reprints of Economics Classics, New York: A.M. Kelley (published 1966), LCCN 68-20529 . * Saunders, Anthony; Walter, Ingo (1994), _Universal Banking in the United States: What could we gain? What could we lose?_, New York: Oxford University Press, ISBN 0-19-508069-6 . * Saunders, Anthony; Walter, Ingo, eds. (1997), _Universal Banking: Financial System Design Reconsidered_, Chicago: Irwin Professional Publishing, ISBN 0-7863-0466-9 . * Uchitelle, Louis (February 16, 2010), "Elders of Wall St. Favor More Regulation", _ New York Times
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_ . * White, Eugene Nelson (1986), "Before the Glass–Steagall Act: An analysis of the investment banking activities of national banks", _ Explorations in Economic History _, 23 (1): 33–55, doi :10.1016/0014-4983(86)90018-5 . * Willis, Henry Parker; Chapman, John (1934), _The Banking Situation: American Post-War Problems and Developments_, New York: Columbia University Press, OCLC
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742920 . * Wilmarth, Jr., Arthur E. (2007), "Walmart and the Separation of Banking and Commerce", _Connecticut Law Review_, 39 (4): 1539–1622, SSRN 984103   .

EXTERNAL LINKS

* Glass–Steagall Act – further readings * On the systematic dismemberment of the Act from PBS\'s _Frontline_ * Full text of the Glass–Steagall Act followed by New York Federal Reserve B