Glass-Steagall Should it be reenacted?
Argument for preserving Glass–Steagall (as written in 1987):
1. Conflicts of interest characterize the granting of credit — lending — and the use of credit — investing — by the same entity, which led to abuses that originally produced the Act.
2. Depository institutions possess enormous financial power, by virtue of their control of other people’s money; its extent must be limited to ensure soundness and competition in the market for funds, whether loans or investments.
3. Securities activities can be risky, leading to enormous losses. Such losses could threaten the integrity of deposits. In turn, the Government insures deposits and could be required to pay large sums if depository institutions were to collapse as the result of securities losses.
4. Depository institutions are supposed to be managed to limit risk. Their managers thus may not be conditioned to operate prudently in more speculative securities businesses. An example is the crash of real estate investment trusts sponsored by bank holding companies (in the 1970s and 1980s).
The argument against preserving the Act (as written in 1987):
1. Depository institutions will now operate in “deregulated” financial markets in which distinctions between loans, securities, and deposits are not well drawn. They are losing market shares to securities firms that are not so strictly regulated, and to foreign financial institutions operating without much restriction from the Act.
2. Conflicts of interest can be prevented by enforcing legislation against them, and by separating the lending and credit functions through forming distinctly separate subsidiaries of financial firms.
3. The securities activities that depository institutions are seeking are both low-risk by their very nature, and would reduce the total risk of organizations offering them – by diversification.
4. In much of the rest of the world, depository institutions operate simultaneously and successfully in both banking and securities markets. Lessons learned from their experience can be applied to our national financial structure and regulation.[8]
[edit]Events following repeal
The repeal enabled commercial lenders such as Citigroup, which was in 1999 the largest U.S. bank by assets, to underwrite and trade instruments such as mortgage-backed securities andcollateralized debt obligations and establish so-called structured investment vehicles, or SIVs, that bought those securities.[15] Elizabeth Warren,[16] author and one of the five outside experts who constitute the Congressional Oversight Panel of the Troubled Asset Relief Program, has said that the repeal of this act contributed to the Global financial crisis of 2008–2009,[17] [18] although some believe that the increased flexibility allowed by the repeal of Glass–Steagall mitigated or prevented the failure of some American banks.[19]
sub-prime loans were just five percent of all mortgage lending.[citation needed] By the time the credit crisis peaked in 2008, they were approaching 30 percent.[citation needed] This correlation is not necessarily an indication of causation however, as there are several other significant events that have impacted the sub-prime market during that time. These include the adoption of mark-to-market accounting, implementation of the Basel Accords, the rise of adjustable rate mortgages etc.[20]
[edit]Proposed re-enactment
In mid-December of 2009, Republican Senator John McCain of Arizona and Democratic Senator Maria Cantwell, who represents Washington State, jointly proposed re-enacting the Glass-Steagall Act, to re-impose the separation of commercial and investment banking that had been in effect from the original Act in 1933, to the time of its initial repeal in 1999.[21] Legislation to re-enact parts of Glass-Steagall was also introduced into the House of Representatives. Banks such as Bank of America have strongly opposed the proposed re-enactment.[22]
Paul Volcker has been an outspoken advocate for the reimplementation of many aspects of Glass-Steagall.[23]
In Mainland Europe, notably in France, Germany and Italy, an increasing number of experts are calling for the adoption of stricter bank regulation based on the Glass-Steagall Act.
Comments