Glass Steagall Act Repeal

6 Key excerpts on "Glass Steagall Act Repeal"

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  eBook - PDF

  New Economic Challenges – 5th International PhD Student Conference

  Collection of Annotations of Contributions

  • Oleksandra Lemeshko(Author)
  • 2017(Publication Date)
  • Masarykova univerzita

    (Publisher)

  All these were done against the backdrop that the existing global financial framework was not sustainable. The recent recession after the Great Depression pave the final way for the overhaul of the entire global financial and banking system. 3.1 Repeal of the Glass-Steagall Act The United States Congress in the middle of June 1933 passed the historic Banking Act of 1933, known as the Glass-Steagall Act, the objective of this act was to ban commercial banks from underwriting securi- ties and engaging in other related financial transactions which falls out of their jurisdiction. * Jeffrey D. Sachs, “With Friends like IMF...”, The (Cleveland) Plain Dealer, June 6, 1998. † Stiglitz spoke at a press briefing at the World Bank's Washington headquarters on Dec. 2, 1998. ‡ Ibidem. § http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.13.4.21. ** Ibidem. 92 Traditional Banks were made to be commercial, that is held deposits and made loans respectively and also made in- vestment banks conduct securities transactions. "The Glass-Steagall Act also created the Federal Deposit Insurance Corporation, the FDIC. The FDIC insured bank deposits of commercial banks. In return for this insurance protection, the Federal Reserve Bank’s control over commercial banks was tightened." * "On the dawn of repeal, the late Senator Paul Wellstone made an impassioned plea on the Senate floor. He said the repeal of Glass-Steagall would enable the creation of financial conglomerates which would be too big to fail. Furthermore, he believed that the regulatory structure would not be able to monitor the activities of these financial conglomerates and they would eventually fail due to engaging in excessively risky financial transactions. Ultimately, he said, prophetically, that the taxpayers would be forced to bail out these too-big-to-fail financial institutions." † The whole idea of the Act was to restore public, consumer and investor confidence in the economy.

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  Economics

  The Definitive Encyclopedia from Theory to Practice [4 volumes]

  • David A. Dieterle(Author)
  • 2017(Publication Date)
  • Greenwood

    (Publisher)

  In 1933, Senator Carter Glass and Representative Henry Steagall introduced the Banking or Glass-Steagall Act. The main purpose of this historic legislation was to limit conflicts of interest between the banks and individual investors caused by the involvement of commercial banks in underwriting activities related to the security exchange. The new law prohibited commercial banks from underwriting securities. In addition, the banks had to choose between being a commercial bank or an investment bank. The Glass-Steagall Act also introduced the Federal Deposit Insurance Corporation (FDIC) to insure deposits of all commercial banks and to increase the control of the Federal Reserve over them. The deposit insurance and most provisions of the act were severely attacked during congressional debate, mainly for limiting competition and introducing inefficiency into the U.S. banking industry. Despite all opposition, the Banking Act of 1933 was signed into law by President Roosevelt on June 16, 1933.

  The law imposed numerous banking reforms and established the FDIC in the U.S. banking system. The Banking Act of 1933 had a significant number of provisions, many of which were changed or repealed over time. The provision that required all FDIC-insured banks to be members of the Federal Reserve System was repealed in 1939. In 1956, the Bank Holding Company Act extended banking regulations by restricting banks that owned other banks from engaging in nonbanking activities or acquiring banks in other states. During the 1960s and 1970s, bank lobbyists persuaded Congress to allow commercial banks to enter the securities market. By the 1970s, a number of investment firms started introducing some of the traditional commercial banking services, offering services such as money market accounts with interest, allowing check writing, and offering credit or debit cards.

  In 1986, the Federal Reserve Board bent the law by allowing commercial banks to earn up to 5 percent of their gross revenue from investment banking. Later, the Federal Reserve Board allowed the Banker Trust, a commercial bank, to actively participate in short-term credit transactions and underwriting activities. Finally, in 1987, after more than five decades of strong lobbying of big commercial and investment firms against the Banking Act of 1933, the Federal Reserve Board voted three to two in favor of easing the restrictions imposed by the act. In March 1987, despite strong opposition from Paul Volcker, the Federal Reserve Board chair at the time, the Fed approved an application by Chase Manhattan to participate in underwriting securities. In addition, the Fed increased the limit for participation of commercial banks in securities investment from 5 percent to 10 percent of their gross revenue.

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  The Economic Dynamics of Law

  • David M. Driesen(Author)
  • 2012(Publication Date)
  • Cambridge University Press

    (Publisher)

  3 Congress deliberately chose to sacrifice economic efficiency and competition in order to reduce systemic risks by separating commercial and investment banking as completely as 1 See Securities Industry Ass’n v. Board of Governors, 468 U.S. 137, 144–45 (1984). 2 Id. at 146–47. 3 Id. at 147. 36 The Economic Collapse of 2008 37 possible. 4 Although a sector of the economy could conceivably collapse under Glass-Steagall, the structural separation of sectors would likely limit the damage. Deposit insurance for commercial banks and strict regulation also greatly diminished the likelihood of the entire commercial banking sector collapsing. The ideological climate of the 1980s led the regulatory agencies implement- ing the Glass-Steagall Act to erode this structural separation of commercial and investment banking. Developments in economic theory tending to glorify mar- kets powerfully contributed to this erosion. In the 1970s and 1980s, economists studying finance formulated and refined the “efficient market hypothesis.” The most prevalent versions of this hypothesis maintain that share prices, after a short period of time, reflect all available information. The hypothesis supports a view of investors as rational actors processing all publicly available infor- mation. Although a few scholars doubted the hypothesis’ significance or even validity even then, for the most part economists and law and economics schol- ars accepted it as an empirically verified truth. The efficient market hypothesis pushed aside the Keynesian view of markets as prone to wild vacillations from time to time, and cast doubt on the need for regulation, especially structural regulation. 5 The ensuing erosion of Glass-Steagall paved the way for the expansion of securitization of loans that led to the debacle.

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  The Changing Face of American Banking

  Deregulation, Reregulation, and the Global Financial System

  • Ranajoy Ray Chaudhuri(Author)
  • 2016(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Finally, Section 32 made it illegal for any individual involved in any aspect of an investment banking establishment from serving as an officer, director, or employee of a national or state bank that was a member of the Federal Reserve System. Critics pointed out that a blanket ban on securities-related activities was not the solution. The Glass-Steagall Act made it illegal for banks to own even safe blue chip stocks with high returns but allowed them to continue making risky real estate loans or international loans. Additionally, assuming that there was enough information, the risk premium would be incorporated into the pricing of the loan. More risky loans should simply carry a higher interest rate. 8 However, information is not always perfect; that continues to be true even today, even within organizations. This is especially true of large corporations with multiple divisions that work autonomously. Cash-strapped regulatory agencies that can’t perform their jobs properly or regulatory agencies that have a conflict of interest greatly compound the problems. Supporters can also point to the unprecedented The Great Depression and the Glass-Steagall Act ● 79 five-decade-long period of stability in the banking sector following the passage of the act. There had been many attempts at passing a deposit insurance bill in Congress prior to the establishment of the FDIC. A representative from Wisconsin intro- duced a deposit insurance bill in the House as far back as 1886. Other bills, 17 of them, followed by 1900, but none cleared Congress. Between 1886 and the inception of the FDIC, 150 separate proposals for the establishment of a deposit insurance program came up in Congress; the sponsors came from 30 states from all over the country and were almost equally divided between the Democrats and the Republicans. Individual states hence began experimenting with deposit insurance.

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  An Introduction to Financial Markets and Institutions

  • Maureen Burton, Reynold F. Nesiba, Bruce Brown(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  This reduced the costs of maintaining a separate board of directors for each bank and the costs of other duplicative overhead expenses. Whether significant savings will be realized remains to be seen. We turn now to the final major piece of banking legislation in the twentieth century. With the passage of the Gramm-Leach-Bliley Act in 1999, the financial services industry of the twenty-first century is far different from that of the twentieth century. The Gramm-leach-bliley Act (glba) of 1999—The Final Demise of Glass-steagall Until 1999, the most significant piece of banking legislation in the twentieth century had been the Glass-Steagall Act of 1933, which separated investment and commercial banking, created the FDIC, and limited the range of assets and liabilities that a commercial bank could hold and issue. After 67 years, this act was effectively repealed with the passage of the Gramm-Leach-Bliley Act (GLBA) in November 1999. The new landmark legislation became effective March 11, 2000, and it significantly impacts the financial services industry. Rather than segmentation among financial service providers, the act allows for considerable financial integration in the financial services industry. Major Provisions of the Gramm-Leach-Bliley Act GLBA allows bank holding companies that meet certain criteria to be certified as financial holding companies (FHCs). FHCs may engage in a broad array of financial and nonfinancial activities. To become an FHC, a bank holding company must file a declaration with the Fed that certifies that all of its depository institutions are well capitalized and well managed and have a “satisfactory” or better rating under the Community Reinvestment Act

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  Wall Street Wars

  The Epic Battles with Washington that Created the Modern Financial System

  • Richard Farley(Author)
  • 2015(Publication Date)
  • Regan Arts.

    (Publisher)

  FOUR

  MORE LIVES THAN A CAT:

  The Glass-Steagall Banking Act of 1933

  The success of the bank reopenings earned Roosevelt an unexpected windfall of political capital for financial reform. But how best to deploy it—or how not to squander it—was not a simple matter. So much needed to be done and every option was fraught with risk. Roosevelt knew that Wall Street was flat on its back after the disastrous performance by the National City Bank officers at the Pecora Hearings and the humiliation of the nationwide bank shutdown and bailout. But he also knew that Wall Street would bounce back, and when it did, it would fight any permanent reform proposals tooth and nail. Time was not the president’s ally.

  Roosevelt’s skeletal financial reform agenda had four essential elements: first, “truth in advertising” in the sale of new securities; second, elimination of stock manipulation and unfair dealing on the securities exchanges; third, stricter control over margin lending to limit stock speculation; and fourth, the separation of commercial banking and investment banking.

  In broad strokes, Roosevelt outlined his seven-point reform program to implement this agenda during an August 20, 1932, campaign speech in Columbus, Ohio:

  “Government cannot prevent some individuals from making errors of judgment. But Government can prevent to a very great degree the fooling of sensible people through misstatements and through the withholding of information on the part of private organizations, great and small, which seek to sell investments to the people of the Nation. First, toward that end and to inspire truth telling, I propose that every effort be made to prevent the issue of manufactured and unnecessary securities of all kinds which are brought out merely for the purpose of enriching those who handle their sale to the public; and I further propose that with respect to legitimate securities the sellers shall tell the uses to which the money is to be put. This truth telling requires that definite and accurate statements be made to the buyers in respect to the bonuses and commissions the sellers are to receive, and, furthermore, true information as to the investment of principal, as to the true earnings, true liabilities and true assets of the corporation itself. Second, we are well aware of the difficulty and often the impossibility under which State Governments have labored in the regulation of holding companies that sell securities in interstate commerce. It is logical, it is necessary and it is right that Federal power be applied to such regulation. Third, for the very simple reason that many exchanges in the business of buying and selling securities and commodities can by the practical expedient of moving elsewhere avoid regulation by any given state, I propose the use of Federal authority in the regulation of stock exchanges. Fourth, the events of the past three years prove that the supervision of national banks for the protection of the public has been ineffective. I propose vastly more rigid supervision. Fifth, we have witnessed not only the unrestrained use of bank deposits in speculation to the detriment of local credit, but we are also aware that this speculation was encouraged by the Government itself. I propose that such speculation be discouraged and prevented. Sixth, investment banking is a legitimate business. Commercial banking is another wholly separate and distinct business. Their consolidation and mingling are contrary to public policy. I propose their separation. Seventh, prior to the panic of 1929, the funds of the Federal Reserve System were used practically without check for many speculative enterprises. I propose the restriction of Federal Reserve Banks in accordance with the original plans and earlier practices of the Federal Reserve System under Woodrow Wilson. Finally, my friends, I propose two new policies for which legislation is not required. They are policies of fair and open dealing on the part of the officials of the American Government1

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