A Glass-Steagall Explainer

by Marilou Long on October 14, 2015

in Banks,Credit Crisis,Debt,S.E.C.

 

The New York Times has an interesting article this morning on the repeal of the Glass-Steagall Act’s impact on the financial crisis.  It also explains the Volcker Rule’s attempt to limit risky trading at investment banks.  From the linked article:

When people talk about banking, they are talking about two broad classes of activities. Commercial banking is what happens at your neighborhood branch: You deposit money in a checking or savings account, and the bank uses those deposits to make loans to consumers or small businesses. Investment banking refers to the kind of banking activity more common on Wall Street, like helping large companies issue stock or bonds in order to fund themselves, and trading securities in hope of making a profit.

In the depths of the Great Depression, a widespread view was that the nation’s ills stemmed from these two types of banking having become intertwined. Problems on Wall Street rippled through the financial system to cause ordinary depositors to lose money and ordinary bank lending to dry up.

The government’s response was the Banking Act of 1933, commonly known as the Glass-Steagall Act (for the bill’s sponsors, Senator Carter Glass of Virginia and Representative Henry Steagall of Alabama), which required that commercial banking and securities activities be separated, not to take place within the same financial institution.

I still have never seen a good explanation of exactly who at the SEC relaxed the leverage ratio in 2004 that allowed five banks, Lehman, Bear Stearns, Merrill Lynch, Goldman Sachs, and Morgan Stanley, to more than double their leverage.  The first three banks subsequently failed.

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