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A Depression-era financial regulation that was repealed almost two decades ago with widespread support is again the subject of fierce debate.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.
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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/
Cohan, William D., “Bring Back Glass-Steagall? Goldman Sachs Would Love That,” The New York Times, April 21, 2017, http://tinyurl.com/
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/
White, Gillian B., and Bourree Lam, “Could Reviving a Defunct Banking Rule Prevent a Future Crisis?” The Atlantic, Aug. 23, 2016, http://tinyurl.com/
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/
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/
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/
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/
The Next Step
Ring-Fencing
“Ringfencing will help in the next banking crisis,” Financial Times, Jan. 10, 2017, https://tinyurl.com/
Carney, John, “Protectionist Walls Are Popping Up … Around Banks,” The Wall Street Journal, Dec. 26, 2016, https://tinyurl.com/
Dunkley, Emma, “Challenger banks under pressure to meet ‘ringfencing’ rules,” Financial Times, May 14, 2017, https://tinyurl.com/
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/
Rappeport, Alan, “Bill to Erase Some Dodd-Frank Banking Rules Passes in House,” The New York Times, June 8, 2017, https://tinyurl.com/
Tabor, Nick, “Why It’s Going to Take Another Financial Catastrophe to Fix Wall Street,” New York Magazine, April 13, 2017, https://tinyurl.com/
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/
Federal government department charged with maintaining financial stability and economic growth.
DOI: 10.1177/237455680318.n1