What is the Glass-Steagall Act?
The 1933 Glass-Steagall Act prohibited commercial banks from investing in stocks to safeguard depositors. Glass-Steagall sought to prevent a repetition of the 1929 stock market catastrophe and commercial bank failures.
On June 16, 1933, President Franklin Delano Roosevelt signed the Act, which became permanent legislation in 1945 as part of the New Deal. After repealing Glass-Steagall in 1999, the FDIC, which protects individual savings, remains in place.
Glass-Steagall Act provisions
Before the Depression, banks misdirected capital and risked risky bets. The Glass-Steagall Act 1933 established a regulatory barrier between commercial and investment bank activity. The law honors Senator Carter Glass, the inventor of the Federal Reserve System, and the previous Chair of the House Banking and Currency Committee, Henry Bascom Steagall. Among its provisions:
- Banks have to select commercial or investment banking. Commercial banks might earn 10% from securities but could underwrite government bonds.
- Amendments to the Act established the Federal Deposit Insurance Corporation (FDIC).
- The measure allowed the Fed to regulate retail banks.
- Glass-Steagall established the Federal Open Market Committee and monetary policy.
- The regulation encourages banks to lend rather than invest in stocks.
Banking Sector Impact
The regulation pushed financial titans like JP Morgan and Company to slash services and revenue. The Glass-Steagall Act created this barrier to prohibit banks from using deposits for speculation and failed underwriting.
The 1956 Bank Holding Firm Act extended the Glass-Steagall Act to include any firm owning 25% or more of two or more banks’ shares. The Glass-Steagall Act regulated them. By the mid-1950s, bank holding firms had emerged to circumvent branching and multi-office regulations. Congress increased Federal Reserve monitoring with the 1956 law.
The 1999 Repeal of the GLB Act
The Glass-Steagall Act’s banking regulations provoked disagreement over their implementation. Diversifying banks can lower customer risk, according to many. Economists say the legislation throttled commercial banking and economic growth until its removal. Others say it reduced market volatility and boosted post-war prosperity.
Congress partly abolished Glass-Steagall in 1999. The Gramm-Leach-Bliley Act, or the Financial Services Modernization Act, abolished the Glass-Steagall Act’s limits prohibiting connections between commercial and investment banks. The FDIC remained operational after the Glass-Steagall repeal.
Financial Crisis After Repeal
According to academics, the abolition of Glass-Steagall led to speculative and dangerous activity, such as the surge in subprime lending, which contributed to the 2008 financial crisis. Proponents of repeal claim the Glass-Steagall Act had a minimal impact on the financial crisis. They assert that almost $5 trillion in worthless home loans was crucial to the 2008 catastrophe.
The U.S. Senate Finance Committee debated repealing Glass-Steagall following Silicon Valley Bank’s failure. After aggressively investing in insured deposits, the 16th largest U.S. bank collapsed in March 2023 due to enormous deposit withdrawals. The Federal Reserve established a Bank Term Funding Program after the collapse to rebuild trust in the banking sector and prevent similar failures.
Glass-Steagall Act Purpose?
The Glass-Steagall Act separated investment and commercial banking. It began after the 1929 stock market disaster.
Glass-Steagall Act: Still in Effect?
No. The FDIC remained after the Clinton Administration disbanded it in 1999.
Why Was Glass-Steagall Repealed?
Long-held concerns that the Glass-Steagall Act’s restrictions on banks were unhealthy and that diversifying institutions would lower risk led to its repeal in 1999.
Bottom Line
The Glass-Steagall Act prohibited commercial banks from high-risk lending to avoid a Great Depression-style financial collapse. Banks might only earn 10% on investments. President Clinton revoked the legislation in 1999 after protests.
Conclusion
- Due to stock market investing, the 1933 Glass-Steagall Act separated investment from commercial banking.
- Combining commercial and investment banking was dangerous and speculative, contributing to the Great Depression.
- Banks have to select commercial or investment banking.
- The 1999 Gramm-Leach-Bliley Act removed Glass-Steagall Act prohibitions on commercial investment bank ties, perhaps contributing to the 2008 financial crisis.
