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Is There Any Talk of Reinstating Glass-Steagall?

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Question: Is there any talk of reinstating the Glass-Steagall Act?

Paul Solman: For those who can’t remember as far back as 1933, Glass-Steagall was an act of Congress passed only three months after President Roosevelt took office and declared a national “bank holiday.” The so-called Banking Act established the FDIC and therefore deposit insurance but also split apart deposit banking from “investment” banking to protect the system from speculation, especially in the then-humbled stock market. Thus, for example, the House of Morgan was split into J.P. Morgan (commercial bank) and Morgan Stanley (investment bank, U.S.) and Morgan Grenfell (investment bank, UK).

Sixty-six years later, a bill called Gramm-Leach-Billey repealed the commercial/investment split, with total support from the Republicans in Congress and the financial honchos of the Clinton administration. Among the dissenters was Senator Bryan Dorgan (D-N.D.), who warned that the new combined banks “would become too big to fail.”

Chuck Schumer (D-N.Y.) spoke for the vast majority: “If we don’t pass this bill, we could find London or Frankfurt or years down the road Shanghai becoming the financial capital of the world…There are many reasons for this bill, but first and foremost is to ensure that U.S. financial firms remain competitive.”

So now, at last, to your question: Is repeal of Gramm-Leach-Billey on the horizon? Apparently not. Or at least, not as far as I can tell, from what reading I’ve been able to do. But it may not matter. That’s because the administration and the Fed under Bernanke seem deeply committed to re-regulating the banking system and their main concern is “too big to fail.” That suggests smaller banks in the future — perhaps much smaller banks.

We don’t yet know how the powers-that-be intend to accomplish this; they don’t seem to know yet themselves. But when you hear Ben Bernanke talk, he seems to worry more about the potential for OVER-regulation than not doing enough. As for too big to fail: “Any firm whose failure would pose a systemic risk [read: “too big to fail”] must receive especially close supervisory oversight of its risk-taking, risk management, and financial condition,” the Fed chairman said in a speech in March, “and be held to high capital and liquidity standards.”

What does the future hold? you might ask. The answer: Who’s to say? But one could imagine possibilities that take us well beyond Glass-Steagall. Suppose that there were banks as large as Citi is today — or larger. But that those banks were institutions that YOU paid to keep and protect your deposited money: “narrow” or “100 percent reserve” banks, they’re called in the literature. The fabled Bank of Amsterdam was the first and foremost of the ilk back in the 1600, but it was hardly the last.

Not saying that’s the future. But banking reform is surely in the air.

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