15667498393_2377319c13_b

What it Means For Big Banks if the Glass-Steagall Act is Revived

Image courtesy of South Bend Voice via Flickr

Big banks had reason to celebrate in 1999, when an act was put in place to lift the restrictions of the regulatory Glass-Steagall Act. The repeal meant that they could grow to become “too big to fail.”

The Glass-Steagall Act is over 80 years old, and has been dormant for 16 years, so why are some politicians now looking to bring it back?

What is the Glass-Steagall Act?

The Glass-Steagall Act came about as a response to the Great Depression after the financial collapse of nearly 5,000 banks. Also known as the Banking Act of 1933, the Glass-Steagall Act placed regulations on national banks, and aimed to prohibit commercial banks from “engaging in the investment business.”

In other words, big banks had been allowed to use depositors’ money to make big risky investments. The banks did, and these risky investments caused depositors to lose money when the market crashed. In 1933, the government put a wall between depositors’ money and risky bank investments to ensure it would never happen again.

[contextly_sidebar id=”VqSKxahXc5EopOSsUUzjOYhuOBJn6SOE”] According to The New York Times, investment banking is common practice on Wall Street, and can play a part in helping large companies issue stock or bonds for funding, and trading securities for a profit. During the Great Depression, issues within Wall Street led to losses in money from depositors.

The Glass-Steagall Act forbade banks from selling securities, and put in place the Federal Deposit Insurance Corporation (FDIC). After decades in use, the 1933 act was halted by the Gramm-Leach-Bilely Act of 1999, in which Congress lifted the many banking restrictions that preceded it.

Why Bring It Back?

Maryland Gov. Martin O’Malley suggested during a 2015 debate that the 2008 financial crash was a result of consolidation in the banking business. Overriding the Glass-Steagall Act, he said, allowed for six major banks to control 65 percent of the GDP, growing from the 15 percent that they held before the 1999 changes.

banks

 

The changes brought on by the Gramm-Leach-Bilely Act allowed for mergers and acquisitions between major banks, which wasn’t possible before 1999. This means that big banks began to get even bigger.

As the biggest banks continue to grow, their prioritization of investment coupled with Wall Street’s risk-taking tendencies has supporters of a Glass-Steagall revival thinking back to the 2008 crash, and what these practices could mean for future financial systems.

The Takeaway

The issue is largely a question of the “too big to fail” theory, in which large institutions must be supported by government help in the wake of a financial crisis, because the potential for failure would bring disastrous ripple effects.

Candidates in support of the Glass-Steagall Act discuss it as a way to break up big banks and regulate the powers of Wall Street.

Though the repeal has been connected with the 2008 financial crisis in the debates, the diminished power of the Glass-Steagall Act was just one of many factors, many of which would have occurred regardless of the size of big banks, that contributed to the crash.

Cheyenne MacDonald