Glass-Steagall Act: 1933 Law Part of 2016 Presidential Campaign
In advance of the 2016 presidential election, a banking law from the Great Depression continues to be the subject of political debate.
The Glass-Steagall Act, whose partial repeal in 1999 has been blamed by many for the financial crisis of 2008-09, imposed on corporations a regulatory separation between traditional banking and higher-risk investing activities.
In July, four U.S. senators introduced a bill seeking to revive the banking law. Sens. Elizabeth Warren, D-Mass., and John McCain, R-Ariz., among others, introduced the 21st Century Glass-Steagall Act, in McCain’s words, in order to “rebuild the wall between commercial and investment banking that was in place for over 60 years, restore confidence in the system, and reduce risk for the American taxpayer.”
The proposal, which has been referred to committee for further evaluation, already has the support of presidential hopefuls from all corners of the political spectrum, including Republican Gov. Rick Perry of Texas, Democratic Gov. Martin O’Malley of Maryland, Republican Ben Carson and Sen. Bernie Sanders, a Vermont independent who is seeking the Democratic nomination.
The bill does have high-profile detractors on both sides, including former Rep. Barney Frank, D-Mass., and former Minnesota Gov. Tim Pawlenty, a Republican. But the closest any current presidential candidate has come to saying no to the new Glass-Steagall is Democratic front-runner Hillary Clinton’s silence on the matter. The former secretary of state, whose husband signed the legislation reversing Glass-Steagall as president in 1999, has so far declined to take a position on the possibility of reinstating it but has suggested she will discuss the matter more as the campaign proceeds.
Since 2016 will mark the first presidential election without an incumbent since the end of the 2008 crisis, the issue of the separation of commercial and investment banking is sure to arise.
Read on for more about the original Glass-Steagall Act, its repeal and the subsequent financial crisis, and its partial reinstatement as the Volcker Rule in 2010.
How we got here
Glass-Steagall and the Banking Act of 1933: The Glass-Steagall Act is actually a set of provisions included in the broader Banking Act of 1933, a response to the bank failures of the Great Depression. The Banking Act created the FDIC to insure consumers’ deposits with commercial banks and included the Glass-Steagall provisions to reduce the risk of providing such insurance. Most critically, Glass-Steagall made it illegal for a bank that held FDIC-insured deposits to invest in anything other than government bonds and similarly low-risk vehicles.
The partial repeal of Glass-Steagall and the financial crisis: After decades of lobbying and proposed legislation, some of the Glass-Steagall provisions were repealed in 1999, when President Bill Clinton signed the Gramm-Leach-Bliley Act. Glass-Steagall’s opponents largely objected to what they perceived as over-regulation by the government of the activities of private industry.
Many believe that Glass-Steagall’s partial repeal contributed heavily to the 2008-09 financial crisis, alongside earlier weakening of the act’s effects through various government actions. Even John S. Reed and Sandy Weill, the former co-chairs of Citigroup — created in 1998 as the acquisition of an investment bank, Salomon Smith Barney, by a commercial bank, Citibank — have both said, in effect, that Glass-Steagall protected the American economy.
Others, including President Clinton, have argued that Glass-Steagall would have done nothing to prevent the financial crisis.
The Volcker Rule, or “Glass-Steagall lite”: Pursuant to the view that the 2008-09 crisis resulted in part from a lack of sufficient separation, post-Glass-Steagall, between investment and commercial banking activities, Congress included the Volcker Rule in the Dodd-Frank reform legislation.
The part of Glass-Steagall known as Section 16, which was not repealed, limits the kinds of investments banks can make with customers’ deposit funds. Section 20, which was repealed, limited what banks could do even with their own money. The Volcker Rule reinstated some of the prohibitions of Section 20.
Critics argue that there are loopholes that make Volcker effectively unenforceable. Volcker allows banks to mitigate their own investment risks by investing in hedge funds and private equity funds. Since the affected banks are so large and have such complex portfolios, it may be prohibitively difficult to differentiate between legal and illegal investments.
These potential issues with Volcker led to the introduction of the 21st Century Glass-Steagall Act, whose fate may well hinge on the results of the 2016 election.
Updated Sept. 3, 2015.