For a partly dismantled piece of financial legislation dating to the Great Depression, the Glass-Steagall Act remains relevant to banking consumers today, having spent the past 20 years under near-constant debate.
Part of a broader set of 1933 regulations, Glass-Steagall prohibited banks that held Federal Deposit Insurance Corp.-insured deposits from investing in anything other than government bonds and similarly low-risk vehicles.
Some economists and politicians have blamed the financial crisis of 2008-09 on the partial repeal of the act in 1999, while others have suggested that the crisis was caused by actions unrelated to high-risk investments that the law had once prevented.
Read on for more about:
- The original Glass-Steagall Act.
- Its partial repeal and the subsequent financial crisis.
- Its partial reinstatement as the Volcker Rule in 2010.
- What the future may hold for Glass-Steagall.
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 move to restore confidence in the banking system after thousands of bank failures in the first years of the Depression.
The Banking Act created the FDIC to safeguard consumers’ deposits at commercial banks and included the Glass-Steagall provisions to reduce the risk of providing such insurance.
Joseph E. Stiglitz, winner of a Nobel Prize in economics and a professor at Columbia University, wrote in a 2009 opinion piece: “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. 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.”
Glass-Steagall made commercial banks lower-risk and made it safer for the government to back those banks with deposit insurance, which would, in turn, prevent another Depression.
The partial repeal of Glass-Steagall
After decades of lobbying and proposed legislation, some Glass-Steagall provisions were repealed in 1999, when the Gramm-Leach-Bliley Act was signed. Glass-Steagall’s opponents had objected to what they perceived as over-regulation of the banking industry.
Among those who hold the repeal partly responsible for the 2008-09 financial crisis: John S. Reed and Sandy Weill, former chairmen of Citigroup, created in 1998 as Citibank acquired Travelers Insurance, which owned investment bank Salomon Smith Barney, effectively crossing the firewall between commercial and investment banking. Reed and Weill have said, in effect, that Glass-Steagall protected the U.S. economy until Gramm-Leach-Bliley was signed.
Others, including economists Paul Krugman and Mike Konczal and fact-checking outlet PolitiFact, have argued that Glass-Steagall would have done nothing to prevent the financial crisis because it didn’t cover the pure investment houses or the “shadow banks” whose risky behaviors most directly underwrote the crisis.
The Volcker Rule, or ‘Glass-Steagall light’
Acting on the idea 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 bill, signed into law by President Barack Obama in 2010.
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.
The future of Glass-Steagall
Potential issues with Volcker, including loopholes and gray areas that may impede enforcement, led to the introduction of the 21st Century Glass-Steagall Act. Four U.S. senators introduced the bill in summer 2015 seeking to revive the broader banking law.
The debate over financial regulation could hinge on the results of the 2016 presidential and congressional elections. Democratic presidential nominee Hillary Clinton says she would not reinstate the banking law and has instead laid out a multipronged plan to mitigate risk in the financial industry.
However, at the urging of Clinton’s former rival for the nomination, Vermont Sen. Bernie Sanders, and others, the Democratic Party has included support for reinstating Glass-Steagall in its official platform for 2016.
While the Republican nominee, Donald Trump, apparently hasn’t directly addressed Glass-Steagall, the law’s reinstatement is also part of his party’s platform. Trump has called for the repeal of Dodd-Frank legislation and more generally has espoused a broader position against federal regulations on the private sector.
Devan Goldstein is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org. Twitter: @devan_.
This article was updated July 27, 2016. It was originally published June 11, 2012.