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The Glass–Steagall legislation describes four provisions of the United States Banking Act of 1933 separating
commercial Commercial may refer to: * (adjective for) commerce, a system of voluntary exchange of products and services ** (adjective for) trade, the trading of something of economic value such as goods, services, information or money * a dose of advertising ...
and
investment Investment is traditionally defined as the "commitment of resources into something expected to gain value over time". If an investment involves money, then it can be defined as a "commitment of money to receive more money later". From a broade ...
banking.. Wilmarth 1990, p. 1161. The article
1933 Banking Act The Banking Act of 1933 () was a statute enacted by the United States Congress that established the Federal Deposit Insurance Corporation (FDIC) and imposed various other banking reforms. The entire law is often referred to as the Glass–Stea ...
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 Carter Glass (January 4, 1858 – May 28, 1946) was an American newspaper publisher and Democratic Party (United States), Democratic politician from Lynchburg, Virginia, Lynchburg, Virginia. He represented Virginia in both houses of United Stat ...
and Representative Henry B. Steagall. 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 A commercial bank is a financial institution that accepts Deposit (finance), deposits from the public and gives loans for the purposes of consumption and investment to make a Profit (economics), profit. It can also refer to a bank or a division o ...
, 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 The Gramm–Leach–Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999, () is an act of the 106th United States Congress (1999–2001). It repealed part of the Glass–Steagall Act of 1933, removing barriers in ...
(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 Citibank, N.A. ("N. A." stands for "National bank (United States), National Association"; stylized as citibank) is the primary U.S. banking subsidiary of Citigroup, a financial services multinational corporation, multinational corporation. Ci ...
's 1998 affiliation with
Salomon Smith Barney Salomon Brothers, Inc., was an American multinational bulge bracket investment bank headquartered in New York City. It was one of the five largest investment banking enterprises in the United States and a very profitable firm on Wall Street du ...
, one of the largest U.S. securities firms, was permitted under the Federal Reserve Board's then existing interpretation of the Glass–Steagall Act. In November 1999, President
Bill Clinton William Jefferson Clinton (né Blythe III; born August 19, 1946) is an American politician and lawyer who was the 42nd president of the United States from 1993 to 2001. A member of the Democratic Party (United States), Democratic Party, ...
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
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
.
Nobel Memorial Prize in Economics The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (), commonly referred to as the Nobel Prize in Economics(), is an award in the field of economic sciences adminis ...
laureate
Joseph Stiglitz Joseph Eugene Stiglitz (; born February 9, 1943) is an American New Keynesian economist, a public policy analyst, political activist, and a professor at Columbia University. He is a recipient of the Nobel Memorial Prize in Economic Sciences (2 ...
argued that the effect of the repeal was "indirect": " en repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top". Economists at the
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of ...
, such as
Chairman The chair, also chairman, chairwoman, or chairperson, is the presiding officer of an organized group such as a board, committee, or deliberative assembly. The person holding the office, who is typically elected or appointed by members of the gro ...
Ben Bernanke Ben Shalom Bernanke ( ; born December 13, 1953) is an American economist who served as the 14th chairman of the Federal Reserve from 2006 to 2014. After leaving the Federal Reserve, he was appointed a distinguished fellow at the Brookings Insti ...
, have argued that the activities linked to the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
were not prohibited (or, in most cases, even regulated) by the Glass–Steagall Act.Mester, Loretta J. "Optimal industrial structure in banking." (2005).


Sponsors

The sponsors of both the Banking Act of 1933 and the Glass–Steagall Act of 1932 were
southern Democrats Southern Democrats are members of the U.S. Democratic Party who reside in the Southern United States. Before the American Civil War, Southern Democrats mostly believed in Jacksonian democracy. In the 19th century, they defended slavery in the ...
: Senator
Carter Glass Carter Glass (January 4, 1858 – May 28, 1946) was an American newspaper publisher and Democratic Party (United States), Democratic politician from Lynchburg, Virginia, Lynchburg, Virginia. He represented Virginia in both houses of United Stat ...
of Virginia (who by 1932 had served in the House and the Senate, and as the Secretary of the Treasury); and Representative Henry B. Steagall of Alabama, who had served in the House for the preceding 17 years.


Legislative history

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 House on February 16, 1932, the Senate on February 19, 1932, and signed into law by President Hoover eight days later. 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 Franklin Delano Roosevelt (January 30, 1882April 12, 1945), also known as FDR, was the 32nd president of the United States, serving from 1933 until his death in 1945. He is the longest-serving U.S. president, and the only one to have served ...
, 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

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&Ls and securities firms took advantage of these loopholes starting in the 1960s to create products and affiliated companies that chipped away at commercial banks' deposit and lending businesses. While permitting affiliations between securities firms and companies other than Federal Reserve member banks, Glass–Steagall distinguished between what a Federal Reserve member bank could do directly and what an affiliate could do. Whereas a Federal Reserve member bank could not buy, sell, underwrite, or deal in any security except as specifically permitted by Section 16, such a bank could affiliate with a company so long as that company was not "engaged principally" in such activities. Starting in 1987, the Federal Reserve Board interpreted this to mean a member bank could affiliate with a securities firm so long as that firm was not "engaged principally" in securities activities prohibited for a bank by Section 16. By the time the GLBA repealed the Glass–Steagall affiliation restrictions, the Federal Reserve Board had interpreted this "loophole" in those restrictions to mean a banking company (
Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services company based in New York City. The company was formed in 1998 by the merger of Citicorp, t ...
, as owner of
Citibank Citibank, N.A. ("N. A." stands for "National bank (United States), National Association"; stylized as citibank) is the primary U.S. banking subsidiary of Citigroup, a financial services multinational corporation, multinational corporation. Ci ...
) could acquire one of the world's largest securities firms (
Salomon Smith Barney Salomon Brothers, Inc., was an American multinational bulge bracket investment bank headquartered in New York City. It was one of the five largest investment banking enterprises in the United States and a very profitable firm on Wall Street du ...
). By defining commercial banks as banks that take in deposits and make loans and investment banks as banks that underwrite and deal with securities the Glass–Steagall act explained the separation of banks by stating that commercial banks could not deal with securities and investment banks could not own commercial banks or have close connections with them. With the exception of commercial banks being allowed to underwrite government-issued bonds, commercial banks could only have 10 percent of their income come from securities.


Decline and repeal

It was not until 1933 that the separation of commercial banking and investment banking was considered controversial. There was a belief that the separation would lead to a healthier financial system. As time passed, however, the separation became so controversial that in 1935, Senator Glass himself attempted to "repeal" the prohibition on direct bank underwriting by permitting a limited amount of bank underwriting of corporate debt. In the 1960s, the
Office of the Comptroller of the Currency The Office of the Comptroller of the Currency (OCC) is an independent bureau within the United States Department of the Treasury that was established by the National Currency Act of 1863 and serves to corporate charter, charter, bank regulation ...
issued aggressive interpretations of Glass–Steagall to permit national banks to engage in certain securities activities. Although most of these interpretations were overturned by court decisions, by the late 1970s, bank regulators began issuing Glass–Steagall interpretations that were upheld by courts and that permitted banks and their affiliates to engage in an increasing variety of securities activities. Starting in the 1960s, banks and non-banks developed financial products that blurred the distinction between banking and securities products, as they increasingly competed with each other. Separately, starting in the 1980s, Congress debated bills to repeal Glass–Steagall's affiliation provisions (Sections 20 and 32). Some believe that major U.S. financial sector firms established a favorable view of deregulation in American political circles, and in using its political influence in Congress to overturn key provisions of Glass-Steagall and to dismantle other major provisions of statutes and regulations that govern financial firms and the risks they may take. In 1999 Congress passed the
Gramm–Leach–Bliley Act The Gramm–Leach–Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999, () is an act of the 106th United States Congress (1999–2001). It repealed part of the Glass–Steagall Act of 1933, removing barriers in ...
, also known as the Financial Services Modernization Act of 1999, to repeal them. Eight days later, President
Bill Clinton William Jefferson Clinton (né Blythe III; born August 19, 1946) is an American politician and lawyer who was the 42nd president of the United States from 1993 to 2001. A member of the Democratic Party (United States), Democratic Party, ...
signed it into law.


Aftermath of repeal

After the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
, some commentators argued that the repeal of Sections 20 and 32 had played an important role in leading to the
United States housing bubble The 2000s United States housing bubble or house price boom or 2000s housing cycle was a sharp run up and subsequent collapse of house asset prices affecting over half of the U.S. states. In many regions a Real-estate bubble, real estate bubb ...
and
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
. Economics Nobel Memorial laureate
Joseph Stiglitz Joseph Eugene Stiglitz (; born February 9, 1943) is an American New Keynesian economist, a public policy analyst, political activist, and a professor at Columbia University. He is a recipient of the Nobel Memorial Prize in Economic Sciences (2 ...
, for instance, argued that " en repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top", and banks which had previously been managed conservatively turned to riskier investments to increase their returns. Another laureate,
Paul Krugman Paul Robin Krugman ( ; born February 28, 1953) is an American New Keynesian economics, New Keynesian economist who is the Distinguished Professor of Economics at the CUNY Graduate Center, Graduate Center of the City University of New York. He ...
, contended that the repealing of the act "was indeed a mistake"; however, it was not the cause of the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
. Other commentators believed that these banking changes had no effect, and the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
would have happened the same way if the regulations had still been in force. Lawrence J. White, for instance, noted that "it was not ommercial banks'investment banking activities, such as underwriting and dealing in securities, that did them in"..


Post-financial crisis reform debate

Following the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
, legislators unsuccessfully tried to reinstate Glass–Steagall Sections 20 and 32 as part of the
Dodd–Frank Wall Street Reform and Consumer Protection Act The Dodd–Frank Wall Street Reform and Consumer Protection Act, commonly referred to as Dodd–Frank, is a United States federal law that was enacted on July 21, 2010. The law overhauled financial regulation in the aftermath of the Great Reces ...
. Both in the United States and elsewhere around the world, banking reforms have been proposed that refer to Glass–Steagall principles. These proposals include issues of " ringfencing" commercial banking operations and
narrow banking Narrow banking is a proposed type of bank called a narrow bank also called a safe bank. Narrow banking would restrict banks to holding liquid and safe government bonds as opposed to other equities (like loans) against depositor's money as opposed ...
proposals that would sharply reduce the permitted activities of commercial banks - institutions that provide capital liquidity to investment management firms to shore up over-inflated market valuation of securities (whether debt or equity). Reconciliation of over-committed funds is possible by filing claims to the FDIC (Federal Deposit Insurance Company) - hence further increasing the federal budget deficit.


See also

*
American International Group American International Group, Inc. (AIG) is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. As of 2023, AIG employed 25,200 people. The company operates through three core ...
* Arthur H. Vandenberg *
Commodity Futures Modernization Act of 2000 The Commodity Futures Modernization Act of 2000 (CFMA) is a United States federal law that ensures that Over-the-counter (finance), over-the-counter (OTC) Derivative (finance), derivatives remained Financial regulation, unregulated. Commodity Ex ...
*
Corporate law Corporate law (also known as company law or enterprise law) is the body of law governing the rights, relations, and conduct of persons, companies, organizations and businesses. The term refers to the legal practice of law relating to corpora ...
* Decline of the Glass–Steagall Act *
Sarbanes–Oxley Act The Sarbanes–Oxley Act of 2002 is a United States federal law that mandates certain practices in financial record keeping and reporting for corporations. The act, , also known as the "Public Company Accounting Reform and Investor Protectio ...
*
Subprime mortgage crisis The American subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010, contributing to the 2008 financial crisis. It led to a severe economic recession, with millions becoming unemployed and many busines ...
*
Systemic risk In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to the risk associated with any one individual entity, group or component of a system, that can be contained therein without harming the ...
*
Volcker rule The Volcker Rule is sectioof the Dodd–Frank Wall Street Reform and Consumer Protection Act (). The rule was originally proposed by American economist and former United States Federal Reserve Chairman Paul Volcker in 2010 to restrict United S ...


Notes


References

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Further reading

* . * . * . * . * . * * . * . * . * . * . * . * . * . * . * . * . * . * . * . * . * . * . * .


External links


History of Glass-Steagall Act from Organization of American Historians


* ttps://fraser.stlouisfed.org/title/466/item/15952 Full text of the Glass–Steagall Act followed by New York Federal Reserve Bank Explanation
Glass Subcommittee hearings

Pecora Investigation hearings

FDIC History: 1933-1983

1987 Federal Reserve Bank of Kansas City Jackson Hole Symposium on Restructuring the Financial System

Public Law 73-66, 73d Congress, H.R. 5661: an Act to Provide for the Safer and More Effective Use of the Assets of Banks, to Regulate Interbank Control, to Prevent the Undue Diversion of Funds into Speculative Operations

The Southeast Missourian, March 10, 1933
details legislative debate when passing the bill {{DEFAULTSORT:Glass-Steagall Act 1933 in American law 73rd United States Congress Federal Deposit Insurance Corporation Legal history of the United States United States federal banking legislation Repealed United States legislation Financial regulation in the United States Separation of investment and retail banking History of banking in the United States