On the very first day of the 113th Congress, representatives Marcy Kaptur (D-OH) and Walter Jones (R-NC) introduced a bill that would restore parts of the Depression-era Glass-Steagall Act. The bill, H.R. 129, aims to “repeal certain provisions of the Gramm-Leach-Bliley Act and revive the separation between commercial banking and the securities business, in the manner provided in the Banking Act of 1933, the so-called ‘Glass-Steagall Act.'” New year, new congress – but will the bill actually lead to reform?
Kaptur introduced the same bill in 2011, under the title, “Return to Prudent Banking Act of 2011.” The bill gained 84 cosponsors, but was abandoned in the House Financial Services committee. Still, since the Return to Prudent Banking’s introduction in April 2011, we’ve seen the Consumer Financial Protection Bureau open its doors and its driving force elected to the U.S. Senate.
A return to a bygone era
What Glass-Steagall did, and what Kaptur aims to do, is reinstate a firewall between commercial banking (deposits and lending) and investment banking (making speculative bets). The rationale behind this is simple: Deposits are guaranteed by the FDIC, putting taxpayers’ money at risk if those deposits are put towards betting on subprime mortgages (hypothetically). As Nobel Prize-winner Joseph Stiglitz put it: “Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively.”
But the cat’s already out of the bag when it comes to mixing commercial and investment banking. Bank of America manages your checking account, Merrill Lynch your portfolio; Chase hands out credit cards and JPMorgan makes trades. To tear asunder what God and Congress have joined together would be a tricky task for both the public and the private sector.
The Volcker Rule attempts to retroactively impose a separation. It would explicitly prohibit an FDIC-backed bank from using its funds in profit-making trades (what’s known as proprietary trading). However, the rule would allow banks make bets with the purpose of mitigating risk. And since our banks are so large and complex, it’s hard to tell a profit-driven trade from a prudence-driven one.