Should consumer and investment banking be separate?

Executive Summary

A Depression-era financial regulation that was repealed almost two decades ago with widespread support is again the subject of fierce debate. The Glass-Steagall Act created a barrier between consumer banking activities, such as deposit-taking and lending, and riskier ventures such as investment banking. Supporters of reinstating the law say it could help the United States avert a new financial crisis by limiting excessive risk-taking; opponents say Glass-Steagall repeal played no role in creating the meltdown of 2008-09. While winning congressional approval for a reinstatement would be difficult, experts say populist anger against Wall Street is likely to keep the issue front and center for the foreseeable future.

Among the key takeaways:

  • President Trump and some of his top advisers have signaled interest in reviving the law in some fashion, although the specific form is unclear.

  • The 1999 decision to repeal Glass-Steagall’s separation of banking activities had bipartisan backing, passed by a Republican-controlled Congress and signed by a Democratic president.

  • The debate over Glass-Steagall comes at a time when Republicans are advocating repeal or dilution of the main regulatory law to emerge from the financial crisis, the Dodd-Frank Act.

Full Report

JPMorgan Chase headquarters in Manhattan. It is one of four major financial conglomerates that resulted from a series of bank mergers following repeal of the Glass-Steagall Act.

(Stan Honda/AFP/Getty Images)

Sen. Elizabeth Warren, D-Mass., who has risen to national prominence through her relentless criticism of the financial industry, has developed a succinct slogan: “Banking should be boring.”

“Checking accounts, savings accounts – the things you and I rely on every day – should be separated from the kind of risk taking that JPMorgan and the Wall Street traders want to take,” she has written.1

It’s a cautionary concept that has been around for the better part of a century, stemming from reforms approved in the wake of the Great Depression. Now, Warren and others of like mind want to revive one of those reforms: a measure known as the Glass-Steagall Act that was passed in 1933 to wall off commercial banking activities, such as collecting deposits and issuing loans, from what was perceived as more speculative work, particularly investment banking. Policymakers at the time bet that separating these financial functions would help create a healthier financial system.2

Congress and President Bill Clinton did away with that separation in 1999, amid arguments that it no longer was needed because banks, and consumers by extension, would benefit from the economies of scale gained through the integration of financial activities.3 The financial crisis hit less than a decade later, triggering the most significant U.S. economic downturn since the Great Depression.

Policymakers are now grappling with whether a return to a rigid division of banking activities could help the country avoid the next financial meltdown – and whether there is enough political will to make it happen. Riding on the outcome is the question of whether the U.S. financial sector, which accounts for more than 7 percent of the country’s GDP, will undergo another wrenching period of restructuring.4

Glass-Steagall has attracted considerable attention in recent years, thanks in part to Warren’s vocal support. It was debated by both major parties during the 2016 presidential elections and was included in each of their platforms; both said that they favored reinstating the wall between commercial and investment banking activities in some form.5

President Trump said in May that a return to the 1933 law was something he was “looking at … right now” – although Treasury Secretary Steven Mnuchin soon called into question how far the president wanted to go in separating bank activities.6

Proponents of reviving Glass-Steagall argue that repealing the separation of banking activities helped bring on the financial crisis. They assert that the change spurred rapid consolidation throughout the industry and heightened a culture of risk-taking.

Investment banks such as Lehman Brothers, Goldman Sachs and Bear Stearns “were becoming more leveraged and more risk-taking in part to defend their business against” commercial banks that had expanded their business lines after the removal of the separation, says Bartlett Naylor, financial policy advocate at the left-leaning consumers group Public Citizen.

This mentality also took hold among commercial banks, whose depositors are insured by the government, in a kind of feedback loop, according to Columbia University economist and Nobel Prize winner Joseph Stiglitz.

“Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail,” Stiglitz wrote at the height of the financial crisis.7 “Investment banks, on the other hand, have traditionally managed rich people’s money – people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risk-taking.”

Furthermore, the commercial banks actually enabled the excessive risk-taking by investment banks in markets such as sub-prime mortgages during the lead-up to the crisis, said Robert Reich, who was secretary of labor under Clinton.

The investment institutions “got their funding from the big banks in the form of lines of credit, mortgages, and repurchase agreements,” Reich told The Atlantic last year.8 “If the big banks hadn’t provided them the money, the [investment banks] wouldn’t have got into trouble. And why were the banks able to give them easy credit on bad collateral? Because Glass-Steagall was gone.”

The story, of course, had a most unhappy ending. Lehman Brothers, dragged down by its exposure to the collapsing sub-prime mortgage market, crashed into bankruptcy in 2008, setting off shock waves that imperiled the entire financial system. Earlier that year, Bear Stearns flirted with insolvency before securing an emergency loan from the Federal Reserve and then agreeing to be sold to JPMorgan at bargain rates.

But critics of this view argue that there is no direct link between ending the separation of banking activities and the financial blowup. The crisis had a number of causes, they assert, none of which was tied to the merging of commercial and investment banking.

“There’s no evidence to suggest that the repeal of Glass-Steagall was a contributing factor, major or minor, to the financial crisis,” says Brian Gardner, a managing director at Keefe, Bruyette & Woods, a New York investment banking firm. “Banks that failed did not do so because they had large investment banking arms that posed risks that they did not appreciate or understand.”

Homeowners line up for help to restructure their mortgages in Los Angeles in 2012. Millions of Americans lost their homes in the financial crisis.

(Patrick Fallon/Bloomberg via Getty Images)

Such critics note that the kinds of activities identified as problematic by supporters of a revived Glass-Steagall – such as making mortgages and extending lines of credit to investment banks – were possible even before the separation was eroded.

“Commercial banks could have done all of those things in the 1960s or earlier, even before the Fed and the OCC [Office of the Comptroller of the Currency] and court decisions began to loosen the strictures of Glass-Steagall,” Lawrence J. White, an expert on financial regulation at New York University’s Stern School of Business, told The Washington Post last year.9

And it was the stand-alone investment banks – Bear Stearns, Merrill Lynch and Lehman Brothers – that ran into the most trouble at the height of the crisis, these critics argue. The damage was actually mitigated because commercial banks were able to buy up the trading units of the most troubled institutions, something that wouldn’t have been allowed had Glass-Steagall still been in effect, says Phillip Swagel, an economics professor at the University of Maryland. He cites JPMorgan’s purchase of Bear Stearns and Bank of America‘s acquisition of Merrill Lynch.

Despite the renewed attention to a revival of Glass-Steagall in recent years, it’s unlikely to happen anytime soon, according to analysts who follow Congress. Wall Street is said to be largely unworried about the prospects, at least for now.10

Even those who favor tougher rules for the banking industry say that separating commercial and investment activities would not provide a panacea. Calls to do so are more born of nostalgia than anything else, perhaps a desire for simple answers to complex problems, some argue.

“There’s a political intuition around Glass-Steagall that explains its popularity,” says Aaron Klein, a fellow at the Brookings Institution, a centrist Washington think tank. “Our grandparents’ generation had a financial crisis, they created a tough new regulatory regime to respond to it and we didn’t have another widespread crisis for several generations – that’s all true. What doesn’t necessarily follow is the need to bring back their exact regime.”

Seeking Financial Stability

The impetus for the original Glass-Steagall Act arose out of the depths of the Great Depression.

A Senate report published in 1934 found that the 1929 stock market crash was attributable in part to the “abuses arising out of the interrelationship of commercial and investment banking.”11

By the time the report was published, a bill sponsored by Sen. Carter Glass, D-Va., and Rep. Henry Steagall, D-Ala., to separate the two banking functions had already passed.12 Banks were given one year to decide whether they would focus on commercial banking serving consumers or investment banking activities such as the underwriting and trading of securities.13 That led to the breakup of several major financial institutions of the day, including banking conglomerate JPMorgan, which separated its commercial bank by the same name from investment bank Morgan Stanley.14

The legislation also established the Federal Deposit Insurance Corp. (FDIC), the agency charged with guaranteeing bank deposits, and created numerous other safeguards for the financial system.

“The separation of commercial and investment banking was not controversial in 1933,” wrote Julia S. Maues, an economist for the Federal Reserve.15 “There was a broad belief that separation would lead to a healthier financial system.”

In 1956, Congress established a similar wall between banking and insurance, restricting banks from underwriting insurance, although they could still sell it, as part of the Bank Holding Company Act.16

It wasn’t until the 1980s that the prohibitions established under Glass-Steagall began to erode. Regulators and the courts issued a series of decisions that weakened the law, by permitting banks to take part in a broader collection of nontraditional activities.17 The OCC, for example, began permitting banks to participate in securities and commodity exchanges and allowed for the management of individual retirement accounts, among other activities. The Fed, meanwhile, expanded over time the proportion of revenue that bank holding companies could bring in from investment banking activities.

Crucially, by the mid-1990s, the leading trade association for Wall Street investment firms had reversed its position on the decades-long separation and begun supporting its repeal. Banks had gained ground in new areas of finance, and investment and insurance firms were losing their competitive edge.

“Because we had knocked so many holes in the walls separating commercial and investment banking and insurance, we were able to aggressively enter their businesses – in some cases more aggressively than they could enter ours,” Edward Yingling, the former head of the American Bankers Association, which represents commercial banks, told a government commission examining the causes of the financial crisis. “So first the securities industry, then the insurance companies, and finally the agents came over and said let’s negotiate a deal and work together.”18

The turning point came with the proposed merger of Citicorp, a commercial bank, and Travelers, an insurance company, in 1998, which the Federal Reserve approved, citing a technical exception to the law. Congress removed the remaining aspects of the Glass-Steagall separation with the passage of the Gramm-Leach-Bliley Act a year later. (The act was named for its main sponsors, Sen. Phil Gramm of Texas, Rep. Jim Leach of Iowa and Rep. Thomas J. Bliley of Virginia, all Republicans.)

Opponents of the rollback point to the many mergers that followed. The banking industry witnessed the consolidation of nearly 40 financial firms, which led to the formation of four major conglomerates – JPMorgan Chase, Citigroup, Bank of America and Wells Fargo – a process that transformed the contours of the financial system.

“[T]hese banks had become so large, complex and interconnected that if they failed, they would endanger the entire banking and financial system, and ultimately, the entire economy,” Better Markets, a group that advocates for more stringent financial regulation, concluded in a recent analysis. “And because they exposed [the] socially useful traditional banking system to losses from high-risk trading and investments, government and taxpayers would end up on the hook for all of it. That’s what happened in 2008.”19

The fight over Glass-Steagall today is in many ways an offshoot of this concern. While the Dodd-Frank Act of 2010 tightened regulation of the financial industry, it did not end the debate over what’s known as “too big to fail” institutions, which are firms that could potentially bring down the broader economy in times of trouble. The concern is that such companies and their top executives are rewarded when times are good, but the government must intervene in moments of distress, putting taxpayer money at risk.

“Even after the crisis, with the passage of the Dodd-Frank Act, we haven’t fully ‘solved’ the ‘too big to fail’ problem,” says Isaac Boltansky, a policy analyst at Compass Point Research & Trading, a Washington-based investment firm. “People are still looking for a solution to the problem of taxpayer risk and privatized gains.”

Renewed Attention

Although Warren’s proposal to revive the division of banking activities is not the only one, her focus on the issue has been critical in putting it back in the spotlight. She first introduced her “21st Century Glass-Steagall Act” in July 2013 along with several Senate co-sponsors, including John McCain, R-Ariz., Maria Cantwell, D-Wash. and Angus King, I-Maine. They reintroduced the measure in April 2017.20

Warren’s star power among progressives is “one of the essential ingredients” to the measure’s popularity, says Public Citizen’s Naylor. “She is magical in her ability to distill complicated issues into fairly approachable terms,” he says.

Her legislation calls for the explicit separation of commercial banking activities from what the lawmakers view as riskier activities, including investing, insurance, the trading of derivatives – financial contracts used for speculation or hedging whose value is based on the performance of an underlying asset – and activities of hedge funds (partnerships that invest in pools of securities). Some note that the bill goes even further than the original 1933 legislation in terms of its impact on the industry, in part because it would ban commercial banks from the derivatives business, where they have been a big part of the market for decades.

“It’s Glass-Steagall on steroids,” says Gardner. “The old Glass-Steagall prohibited the affiliation of a commercial bank and an investment bank within the same holding company. The Warren bill goes beyond that. It really rewrites the book on how banks operate.”

Rep. Marcy Kaptur, D-Ohio, has introduced legislation in the House to bring back a Glass-Steagall separation, garnering the support of nearly 50 lawmakers, almost all of them Democrats.21

The truly new element in the debate is that reviving Glass-Steagall has now captured the attention of some Republicans. It was included in the GOP’s 2016 platform and continues to be a point of discussion for members of the Trump administration.

Conservative support for the issue has raised some eyebrows, given that the White House is also working with the Republican-dominated Congress to roll back major portions of Dodd-Frank. The House on June 8 passed the Financial Choice Act, which would ease or eliminate many of the regulations imposed on banks by Dodd-Frank; it faces an uncertain future in the Senate.22 The Treasury Department on June 12 issued its own recommendations for a relaxation of Dodd-Frank regulations.23

Boltansky sees a messaging strategy at work in the Trump administration’s statements about Glass-Steagall: “This is a way for Republicans to say, ‘We’re not for deregulating completely,’” he says.

Isaac Boltansky

In addition to Trump’s comment in May, some of his senior aides have signaled interest. Gary Cohn, Trump’s top economic adviser, reportedly told lawmakers in a closed-door meeting in April that the administration favored a separation of consumer lending and investment activities.24

Skeptics have suggested that Goldman Sachs, where Cohn previously served as second-in-command, would singularly benefit from a return to Glass-Steagall. The investment bank converted itself into a bank holding company during the financial crisis so it could have access to lending facilities offered by the Federal Reserve, but has largely avoided expanding its commercial banking operations.25

Observers say that if Glass-Steagall-style divisions were imposed again, it would be easier for Goldman to sell off its consumer-focused businesses and focus solely on investment banking than it would be for competitors such as JPMorgan Chase and Citigroup to untangle their affiliate businesses, which could give Goldman a competitive edge.26

The Treasury Department’s Mnuchin appeared to pour some cold water on White House support for a Glass-Steagall revival when he testified before the Senate Banking Committee in May. He told the panel that the administration was not looking to break up big banks.27 “There are aspects of [Glass-Steagall] that we think may make sense,” he told lawmakers. “But we never said before that we supported a full separation of banking and investment banking.”

If the administration is seeking a less stringent change to the system, it may take a look at a measure being phased in by British bank regulators based on the idea of “ring-fencing.”

Instead of an explicit separation between different types of activities, a ring-fencing model would permit bank holding companies to own both commercial and investment banking subsidiaries. But there would be rules in place to prohibit the banking unit, insured by government funds, to bail out the other affiliates.28 This would seek to address a key concern of Glass-Steagall advocates, that the federal government shouldn’t be responsible for backing riskier financial activities.

The idea has been championed in the United States by FDIC Vice Chairman Thomas Hoenig, who unveiled his own proposal in March. Bank holding companies would be permitted to maintain both commercial and investment banking businesses, but there would be limits designed to ensure that securities operations could not access government backing in times of trouble. This would be accomplished through the structuring of separately capitalized and managed affiliates for traditional and nontraditional banking activities.29

Thomas Hoenig

“Through the booming 20th century and during the era of Glass-Steagall, investment banks underwrote companies that helped to build the modern economy and became part of the national fabric,” Hoenig said in explaining the rationale for his initiative. He said his proposal “will provide a more level competitive playing field among and between commercial and investment banks.”30

Still, despite the increased attention on a Glass-Steagall revival, some observers have suggested that none of the current proposals has a strong chance of becoming law – in part because disagreement continues about what a split in bank activities should look like and how it would be achieved.

“Support for it is an inch deep and a mile wide,” says John Berlau, a senior fellow at the Competitive Enterprise Institute, a libertarian think tank based in Washington.

“Glass-Steagall is like many issues in Congress as there is conceptual agreement, but consensus evaporates once the conversation shifts to specifics,” says Boltansky. “There is no clear path forward on legislation and there hasn’t even been a real industry pushback yet.”

Gardner of Keefe, Bruyette & Woods puts the odds of the law coming back in some form in the near term at a “low probability, less than 50-50.” Still, he says, the chances are “not zero” because of ongoing populist anger against Wall Street and the election of a president with more of an interest in getting deals done than an ideological bent.

“It speaks to the populism of the day and the political environment that banks, especially large banks, make a very tempting target,” Gardner says.

Given widespread disagreement about the impact of repeal and its contributions to the financial crisis, consensus may be far off.

Supporters of reviving Glass-Steagall say the transition under either type of plan would be less onerous than critics suggest. The benefits of so-called universal banking, where a bank provides under one roof all of the necessary services consumers and businesses need, have been overstated, they argue. Experts note that the largest institutions have underperformed market expectations and have proven to be unwieldy due to their size and complexity.31

Those supporting the return to a Glass-Steagall model also argue that it would again simplify the financial system and reduce overall risk. “Glass-Steagall would focus bankers on the boring business of making loans to consumers and businesses,” says Naylor. “And it would sever funding made cheap, abundant and blind-to-risk for investment banking.”

The separation would also go at least part of the way towards reducing the size of the largest institutions, supporters argue. The size and scope of some of the biggest banks have fueled concerns that the government will have to continue to bail them out in times of trouble.

“Restoring the separation between commercial and investment banking is one of the most sensible layers of protection because it takes away the taxpayer subsidy of insured deposits while at the same time forcing the biggest banks to absorb their own costs and, therefore, become less dangerous to taxpayers and the economy,” says advocacy group Better Markets in its report.32

But opponents argue that the upheaval could be extensive, depending on the final shape of any legislation.

“It would be disruption at banks like in the 1930s, as banks sell off their affiliates,” says Berlau, who argues that the process could actually spur greater concentration within the securities industry, as firms such as Goldman Sachs and Morgan Stanley buy up investment affiliates sold off by commercial banks.

Phillip Swagel

Others say that while separation could reduce financial risk to a degree, it may not balance out the disadvantages of making such a dramatic change. “I guess I don’t see the benefits as outweighing the costs,” says Swagel, the economics professor.

He argues that those in favor of the change haven’t explained what kind of improvements to financial stability it would provide above and beyond reforms included in Dodd-Frank, including the Volcker Rule, which bans the investing of in-house funds, known as proprietary trading, and limits bank ownership in hedge funds and private equity firms.

“What’s the mechanism by which the financial system is more stable above and beyond the Volcker Rule?” Swagel says.

Although the largest banks would be likely to vigorously oppose any serious move to unravel their business model, they do not profess to be overly concerned at this point.

“I have yet to have anybody really explain to me what value there is in terms of either a reinstatement of Glass-Steagall, which is in itself strange, or what ‘21st century Glass-Steagall’ is,” Michael Corbat, CEO of Citigroup, said in April. “We continue to ask about it but not necessarily be that focused on it.”33

About the Author

Victoria Finkle is a freelance journalist based in Washington, D.C., who focuses on business, banking and public policy. She has written for The New York Times, Inc. magazine, Bloomberg BNA and Washington Monthly, and previously worked as a staff writer for the American Banker newspaper, covering Capitol Hill and consumer finance. Her previous reports for SAGE Business Researcher were on behavioral economics, financial technology, shadow banking and the Federal Reserve.

Chronology

 
1929-1998Crisis-spawned restrictions erode over time.
1929Stock market crashes, leading to the Great Depression.
1933Congress passes and President Franklin Roosevelt signs the Glass-Steagall Act, which separates commercial and investment banking activities and establishes the Federal Deposit Insurance Corp., among other reforms.
1956Congress approves the Bank Holding Company Act, which expands upon Glass-Steagall to bar commercial banks from underwriting insurance.
1987Regulators and the courts begin to loosen the restrictions walling off banks from certain types of financial activities, including securities trading and insurance.
1998The Federal Reserve approves the merger of Citicorp, a bank, and Travelers Group, an insurance company, although the Fed’s action would require newly formed Citigroup to sell off certain assets within a few years absent changes to Glass-Steagall; Sanford Weill, then chairman of Travelers, correctly predicts that the rules for banking would change before that becomes necessary.
1999-presentRepeal, new crisis and calls for revival.
1999In the wake of the Citigroup merger, Congress passes and President Bill Clinton signs the Gramm-Leach-Bliley Act, which among other things repeals the separation of certain financial activities.
2008A severe recession, the worst since the Depression, peaks in the fall with the failure of financial services firm Lehman Brothers.… JPMorgan Chase and Bank of America buy up failed investment banks Bear Stearns and Merrill Lynch, actions that would not have been permitted under the Glass-Steagall regulatory regime.… At the height of the turmoil, Goldman Sachs and Morgan Stanley convert to bank-holding companies to gain access to lending facilities offered by the Federal Reserve.
2010Congress passes the Dodd-Frank Act, a series of post-crisis reforms for the banking industry; the law includes a partial prohibition on certain activities, such as proprietary trading, at depository institutions under the “Volcker Rule.”
2013Sen. Elizabeth Warren, D-Mass., introduces a bill to bring back a modernized version of the Glass-Steagall Act, returning the issue to the spotlight.
2016Both Democrats and Republicans include proposals to restore Glass-Steagall in their party platforms ahead of the November presidential and congressional elections.
2017President Trump and some of his advisers signal they are looking into bringing back Glass-Steagall, although others in the administration backtrack, leaving some confusion about what type of measure the White House might support. Major legislation by House Republicans to roll back parts of Dodd-Frank does not mention Glass-Steagall.
  

Resources for Further Study

Bibliography

Books

Blinder, Alan, “After the Music Stopped: The Financial Crisis, The Response and the Work Ahead,” Penguin Books, 2013. A Princeton University economist discusses the causes of the financial crisis, dismisses the idea of reinstating Glass-Steagall and proposes how to reform the financial system.

Johnson, Simon, and James Kwak, “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown,” Pantheon Books, 2010. Professors from the Massachusetts Institute of Technology (Johnson) and the University of Connecticut (Kwak) recount how eliminating Glass-Steagall and other actions during the 20th century bolstered the power and risk-taking of the country’s largest banks, leading up to the 2008 crisis.

Articles

Carney, John, “The Secret History of Glass-Steagall,” The Wall Street Journal, July 19, 2016, http://tinyurl.com/yblxru6x. A journalist offers a detailed look at how restrictions under Glass-Steagall were slowly loosened even before the law’s formal repeal in 1999.

Cohan, William D., “Bring Back Glass-Steagall? Goldman Sachs Would Love That,” The New York Times, April 21, 2017, http://tinyurl.com/ybzahuav. A financial columnist examines why Goldman Sachs would potentially benefit from a return to Glass-Steagall while many of its competitors would face great disruption.

Irwin, Neil, “What Is Glass-Steagall? The 82-Year-Old Banking Law That Stirred the Debate,” The New York Times, Oct. 14, 2015, http://tinyurl.com/y7es8z2z. A journalist provides a broad explainer on the history of Glass-Steagall and the current fight over it.

White, Gillian B., and Bourree Lam, “Could Reviving a Defunct Banking Rule Prevent a Future Crisis?” The Atlantic, Aug. 23, 2016, http://tinyurl.com/y7m95tov. Prominent economists and financial experts debate whether bringing back the Depression-era provision could improve financial stability.

Reports and Studies

“The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States,” Financial Crisis Inquiry Commission, January 2011, http://tinyurl.com/7vqp9qe. The official report by a congressionally appointed commission to investigate the root causes of the financial crisis, which concludes that the crash was attributable to numerous business and regulatory failures.

Carpenter, David H., Edward V. Murphy and M. Maureen Murphy, “The Glass-Steagall Act: A Legal and Policy Analysis,” Congressional Research Service, Jan. 19, 2016, http://tinyurl.com/y8z6eemd. A report by Congress’s research arm reviews Glass-Steagall’s history and the contemporary debate over the provision.

Naylor, Bartlett, “Too Big: The Mega-banks are Too Big to Fail, Too Big to Jail, and Too Big to Manage,” Public Citizen, June 2016, http://tinyurl.com/ya7ln8m4. A consumer advocate lays out the case for why Glass-Steagall is needed to help curb risky activities by banks and why the largest financial institutions should be broken up.

Wilmarth, Arthur Jr., “Citigroup: A Case Study in Managerial and Regulatory Failures,” Indiana Law Review, pp. 69-137, last revised Oct. 19, 2014, http://tinyurl.com/ycexeuaf. A George Washington University law professor examines the performance of Citigroup, the first universal bank to emerge after the relaxation of Glass-Steagall restrictions, arguing that the concept of the megabank conglomerate is flawed and no longer viable.

The Next Step

Ring-Fencing

“Ringfencing will help in the next banking crisis,” Financial Times, Jan. 10, 2017, https://tinyurl.com/y8ghckpt. The Financial Times editorial board argues that “ring-fencing” – a regulatory system that permits bank holding companies to own both commercial and investment banking subsidiaries but with safeguards – will prove useful during a financial crisis, despite banks’ concerns that being required to comply with ring-fencing rules by 2019 as the United Kingdom withdraws from the European Union will create too many complications.

Carney, John, “Protectionist Walls Are Popping Up … Around Banks,” The Wall Street Journal, Dec. 26, 2016, https://tinyurl.com/yawv4mp3. Regulators around the world are opting for a national approach over a global one as they create a type of ring-fencing meant to ensure local banking branches will remain viable during a financial crisis.

Dunkley, Emma, “Challenger banks under pressure to meet ‘ringfencing’ rules,” Financial Times, May 14, 2017, https://tinyurl.com/mxyoe7r. Smaller banks must meet ring-fencing rules by 2019, but complying with the regulations could lead to far higher costs, analysts say.

Future of Banking Regulations

Isaac, William M., and Richard M. Kovacevich, “The Shattered Arguments for a New Glass-Steagall,” The Wall Street Journal, April 25, 2017, https://tinyurl.com/y7aqo5k3. A former Federal Deposit Insurance Corp. chairman (Isaac) and former Wells Fargo CEO (Kovacevich) argue that Bear Stearns, Lehman Brothers and Merrill Lynch all failed because they did not diversify their risks enough, and warn that separating commercial and investment banking would prohibit banks from achieving the diversification necessary to withstand a crisis.

Rappeport, Alan, “Bill to Erase Some Dodd-Frank Banking Rules Passes in House,” The New York Times, June 8, 2017, https://tinyurl.com/yb7jzu73. House Republicans passed the Financial Choice Act, which would greatly alter the Dodd-Frank law, without any Democratic support, and analysts say the bill won’t get Senate approval without extensive changes.

Tabor, Nick, “Why It’s Going to Take Another Financial Catastrophe to Fix Wall Street,” New York Magazine, April 13, 2017, https://tinyurl.com/y85wtkyw. Neil Barofsky, the federal government’s former special inspector general for the Troubled Asset Relief Program, says Dodd-Frank did not go far enough in reforming the banking system, and worries that another financial crisis will be needed before rules are in place to break up big banks.

Organizations

American Bankers Association
1120 Connecticut Ave., N.W., Washington, DC 20036
1-800-BANKERS (1-800-226-5377)
www.aba.com
Trade association for the commercial banking industry.

Competitive Enterprise Institute
1310 L St., N.W., 7th Floor, Washington, DC 20005
1-202-331-1010
https://cei.org
Libertarian think tank that studies a host of issues, including banking and finance.

Federal Deposit Insurance Corp.
550 17th St., N.W., Washington, DC 20429
1-877-275-3342
www.fdic.gov
Agency that provides deposit insurance for the banking system.

Public Citizen
1600 20th St., N.W., Washington, DC 20009
1-202-588-1000
www.citizen.org
Left-leaning consumer advocacy group founded by Ralph Nader.

Securities Industry and Financial Markets Association
120 Broadway, 35th Floor, New York, NY 10271
1-212-313-1200
www.sifma.org
Organization representing the securities industry, including investment firms, asset managers and banks.

U.S. Department of the Treasury
1500 Pennsylvania Ave., N.W., Washington, DC 20220
1-202-622-2000
www.treasury.gov/Pages/default.aspx
Federal government department charged with maintaining financial stability and economic growth.

Notes

[1] Elizabeth Warren, “Banking should be boring,” blog post, Elizabeth Warren for Senate, May 22, 2012, http://tinyurl.com/y7rmsk4j.

Footnote:
1. Elizabeth Warren, “Banking should be boring,” blog post, Elizabeth Warren for Senate, May 22, 2012, http://tinyurl.com/y7rmsk4j.

[2] Julia Maues, “Banking Act of 1933 (Glass-Steagall),” Nov. 22, 2013, http://tinyurl.com/y8e4bcc2.

Footnote:
2. Julia Maues, “Banking Act of 1933 (Glass-Steagall),” Nov. 22, 2013, http://tinyurl.com/y8e4bcc2.

[3] Stephen Labaton, “Congress Passes Wide-Ranging Bill Easing Bank Laws,” The New York Times, Nov. 5, 1999, http://tinyurl.com/dna5hz.

Footnote:
3. Stephen Labaton, “Congress Passes Wide-Ranging Bill Easing Bank Laws,” The New York Times, Nov. 5, 1999, http://tinyurl.com/dna5hz.

[4] “Finance and Insurance Led Growth in the Fourth Quarter,” Bureau of Economic Analysis, April 21, 2017, Table 5, p. 10, http://tinyurl.com/yddyqedf.

Footnote:
4. “Finance and Insurance Led Growth in the Fourth Quarter,” Bureau of Economic Analysis, April 21, 2017, Table 5, p. 10, http://tinyurl.com/yddyqedf.

[5] Donna Borak, “GOP Platform Calls for Revival of Glass-Steagall,” The Wall Street Journal, July 19, 2016, http://tinyurl.com/yaquocj6.

Footnote:
5. Donna Borak, “GOP Platform Calls for Revival of Glass-Steagall,” The Wall Street Journal, July 19, 2016, http://tinyurl.com/yaquocj6.

[6] Jennifer Jacobs and Margaret Talev, “Trump Weighs Breaking Up Wall Street Banks, Raising Gas Tax,” Bloomberg News, May 1, 2017, http://tinyurl.com/m4prhwx; Chris Isidore, “Elizabeth Warren and Steven Mnuchin go at it over breaking up big banks,” CNN Money, May 19, 2017, http://tinyurl.com/y8b4343u.

Footnote:
6. Jennifer Jacobs and Margaret Talev, “Trump Weighs Breaking Up Wall Street Banks, Raising Gas Tax,” Bloomberg News, May 1, 2017, http://tinyurl.com/m4prhwx; Chris Isidore, “Elizabeth Warren and Steven Mnuchin go at it over breaking up big banks,” CNN Money, May 19, 2017, http://tinyurl.com/y8b4343u.

[7] Joseph Stiglitz, “Capitalist Fools,” Vanity Fair, Dec. 9, 2008, http://tinyurl.com/y95go75t.

Footnote:
7. Joseph Stiglitz, “Capitalist Fools,” Vanity Fair, Dec. 9, 2008, http://tinyurl.com/y95go75t.

[8] Gillian B. White and Bourree Lam, “Could Reviving a Defunct Banking Rule Prevent a Future Crisis?” The Atlantic, Aug. 23, 2016, http://tinyurl.com/y7m95tov.

Footnote:
8. Gillian B. White and Bourree Lam, “Could Reviving a Defunct Banking Rule Prevent a Future Crisis?” The Atlantic, Aug. 23, 2016, http://tinyurl.com/y7m95tov.

[9] Glenn Kessler, “Fact Checker: Bernie Sanders’s claim that Glass-Steagall banned commercial bank loans to ‘shadow banks,’” The Washington Post, Jan. 11, 2016, http://tinyurl.com/y93zk7jj.

Footnote:
9. Glenn Kessler, “Fact Checker: Bernie Sanders’s claim that Glass-Steagall banned commercial bank loans to ‘shadow banks,’” The Washington Post, Jan. 11, 2016, http://tinyurl.com/y93zk7jj.

[10] Max Abelson, “Wall Street Thinks Trump’s All Talk When It Comes to Breaking Up Banks,” Bloomberg News, May 16, 2017, http://tinyurl.com/ycx82yrd.

Footnote:
10. Max Abelson, “Wall Street Thinks Trump’s All Talk When It Comes to Breaking Up Banks,” Bloomberg News, May 16, 2017, http://tinyurl.com/ycx82yrd.

[11] Jim Puzzanghera, “Something Trump and Elizabeth Warren agree on: Bringing back Glass-Steagall to break up big banks,” Los Angeles Times, May 12, 2017, http://tinyurl.com/y8dbyamu; “Stock Exchange Practices – Report of the Committee on Banking and Currency,” United States Senate, June 6, 1934, http://tinyurl.com/y75ag5e6.

Footnote:
11. Jim Puzzanghera, “Something Trump and Elizabeth Warren agree on: Bringing back Glass-Steagall to break up big banks,” Los Angeles Times, May 12, 2017, http://tinyurl.com/y8dbyamu; “Stock Exchange Practices – Report of the Committee on Banking and Currency,” United States Senate, June 6, 1934, http://tinyurl.com/y75ag5e6.

[12] David H. Carpenter, Edward V. Murphy and M. Maureen Murphy, “The Glass-Steagall Act: A Legal and Policy Analysis,” Congressional Research Service, Jan. 19, 2016, p. 4, http://tinyurl.com/y8z6eemd.

Footnote:
12. David H. Carpenter, Edward V. Murphy and M. Maureen Murphy, “The Glass-Steagall Act: A Legal and Policy Analysis,” Congressional Research Service, Jan. 19, 2016, p. 4, http://tinyurl.com/y8z6eemd.

[13] Maues, op. cit.

Footnote:
13. Maues, op. cit.

[14] Carpenter, et al., op. cit.

Footnote:
14. Carpenter, et al., op. cit.

[15] Maues, op. cit.

Footnote:
15. Maues, op. cit.

[16] James Lardner, “A Brief History of the Glass-Steagall Act,” Demos, Nov. 10, 2009, http://tinyurl.com/yapek5j2.

Footnote:
16. James Lardner, “A Brief History of the Glass-Steagall Act,” Demos, Nov. 10, 2009, http://tinyurl.com/yapek5j2.

[17] Carpenter, et al., op. cit.

Footnote:
17. Carpenter, et al., op. cit.

[18] “The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States,” Financial Crisis Inquiry Commission, January 2011, p. 54, http://tinyurl.com/7vqp9qe.

Footnote:
18. “The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States,” Financial Crisis Inquiry Commission, January 2011, p. 54, http://tinyurl.com/7vqp9qe.

[19] “Repealing Glass-Steagall Contributed to the 2008 Financial Crash; Properly Reinstating it Can be an Important Protection to Prevent Future Crashes and Taxpayer Bailouts,” Better Markets, May 1, 2017, p. 3, http://tinyurl.com/yc4bvcdc.

Footnote:
19. “Repealing Glass-Steagall Contributed to the 2008 Financial Crash; Properly Reinstating it Can be an Important Protection to Prevent Future Crashes and Taxpayer Bailouts,” Better Markets, May 1, 2017, p. 3, http://tinyurl.com/yc4bvcdc.

[20] “Senators Warren, McCain, Cantwell and King Introduce 21st Century Glass-Steagall Act,” press release, Sen. Elizabeth Warren, April 6, 2017, http://tinyurl.com/yazsp7at.

Footnote:
20. “Senators Warren, McCain, Cantwell and King Introduce 21st Century Glass-Steagall Act,” press release, Sen. Elizabeth Warren, April 6, 2017, http://tinyurl.com/yazsp7at.

[21] Elizabeth Dexheimer, “Riding Cohn Momentum, Senators Call for Glass-Steagall Return,” Bloomberg News, April 6, 2017, http://tinyurl.com/mu2qfrl; “H.R.790 - Return to Prudent Banking Act of 2017,” Congress.gov, http://tinyurl.com/yarto8q3.

Footnote:
21. Elizabeth Dexheimer, “Riding Cohn Momentum, Senators Call for Glass-Steagall Return,” Bloomberg News, April 6, 2017, http://tinyurl.com/mu2qfrl; “H.R.790 - Return to Prudent Banking Act of 2017,” Congress.gov, http://tinyurl.com/yarto8q3.

[22] Renae Merle, “House passes sweeping legislation to roll back banking rules,” The Washington Post, June 9, 2017, http://tinyurl.com/ychg76kh.

Footnote:
22. Renae Merle, “House passes sweeping legislation to roll back banking rules,” The Washington Post, June 9, 2017, http://tinyurl.com/ychg76kh.

[23] “Treasury Releases First Report on Core Principles of Financial Regulation Stimulating Economic Growth, Increasing Access to Capital & Taxpayer Protection Are Top Priorities,” U.S. Department of the Treasury, June 12, 2017, http://tinyurl.com/y9cnn7h4; Ryan Tracy and Kate Davidson, “Trump Team Proposes Broad Rethink of Financial Rulebook,” The Wall Street Journal, June 12, 2017, http://tinyurl.com/y7faacva.

Footnote:
23. “Treasury Releases First Report on Core Principles of Financial Regulation Stimulating Economic Growth, Increasing Access to Capital & Taxpayer Protection Are Top Priorities,” U.S. Department of the Treasury, June 12, 2017, http://tinyurl.com/y9cnn7h4; Ryan Tracy and Kate Davidson, “Trump Team Proposes Broad Rethink of Financial Rulebook,” The Wall Street Journal, June 12, 2017, http://tinyurl.com/y7faacva.

[24] Elizabeth Dexheimer, “Cohn Backs Wall Street Split of Lending, Investment Banks,” Bloomberg News, April 5, 2017, http://tinyurl.com/lgtez2b.

Footnote:
24. Elizabeth Dexheimer, “Cohn Backs Wall Street Split of Lending, Investment Banks,” Bloomberg News, April 5, 2017, http://tinyurl.com/lgtez2b.

[25] Andrew Ross Sorkin and Vikas Bajaj, “Shift for Goldman and Morgan Marks the End of an Era,” The New York Times, Sept. 21, 2008, http://tinyurl.com/3jkez7.

Footnote:
25. Andrew Ross Sorkin and Vikas Bajaj, “Shift for Goldman and Morgan Marks the End of an Era,” The New York Times, Sept. 21, 2008, http://tinyurl.com/3jkez7.

[26] William D. Cohan, “Bring Back Glass-Steagall? Goldman Sachs Would Love That,” The New York Times, April 21, 2017, http://tinyurl.com/ko4dy5s; see also Patrick Jenkins, “The tangled web of Gary Cohn, Goldman Sachs and Glass-Steagall,” Financial Times, April 10, 2017, http://tinyurl.com/yay7domz.

Footnote:
26. William D. Cohan, “Bring Back Glass-Steagall? Goldman Sachs Would Love That,” The New York Times, April 21, 2017, http://tinyurl.com/ko4dy5s; see also Patrick Jenkins, “The tangled web of Gary Cohn, Goldman Sachs and Glass-Steagall,” Financial Times, April 10, 2017, http://tinyurl.com/yay7domz.

[27] Isidore, op. cit.

Footnote:
27. Isidore, op. cit.

[28] Patrick Jenkins and Barney Jopson, “Support builds for watered-down version of Glass-Steagall law,” Financial Times, April 18, 2017, http://tinyurl.com/y7semdvc.

Footnote:
28. Patrick Jenkins and Barney Jopson, “Support builds for watered-down version of Glass-Steagall law,” Financial Times, April 18, 2017, http://tinyurl.com/y7semdvc.

[29] Thomas Hoenig, “A Market-Based Proposal for Regulatory Relief and Accountability,” Federal Deposit Insurance Corp., March 13, 2017, http://tinyurl.com/yafp2tug.

Footnote:
29. Thomas Hoenig, “A Market-Based Proposal for Regulatory Relief and Accountability,” Federal Deposit Insurance Corp., March 13, 2017, http://tinyurl.com/yafp2tug.

[30] Ibid.

Footnote:
30. Ibid.

[31] Damian Chunilal, “Why Universal Banks Are Failing,” Bloomberg View, Jan. 27, 2016, http://tinyurl.com/y7mrejlh.

Footnote:
31. Damian Chunilal, “Why Universal Banks Are Failing,” Bloomberg View, Jan. 27, 2016, http://tinyurl.com/y7mrejlh.

[32] ldquo;Repealing Glass-Steagall Contributed …,” Better Markets, op. cit.

Footnote:
32. ldquo;Repealing Glass-Steagall Contributed …,” Better Markets, op. cit.

[33] Lauren Tara LaCapra, “Wall Street CEOs downplay risk of new bank breakup law,” Reuters, April 13, 2017, http://tinyurl.com/yd5xcgvz.

Footnote:
33. Lauren Tara LaCapra, “Wall Street CEOs downplay risk of new bank breakup law,” Reuters, April 13, 2017, http://tinyurl.com/yd5xcgvz.

 

DOI: 10.1177/237455680318.n1