Glass-Steagall Act

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Glass-Steagall Act

The Glass-Steagall Act, also known as the Banking Act of 1933 (48 Stat. 162), was passed by Congress in 1933 and prohibits commercial banks from engaging in the investment business.

It was enacted as an emergency response to the failure of nearly 5,000 banks during the Great Depression. The act was originally part of President franklin d. roosevelt's New Deal program and became a permanent measure in 1945. It gave tighter regulation of national banks to the Federal Reserve System; prohibited bank sales of Securities; and created the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits with a pool of money appropriated from banks.

Beginning in the 1900s, commercial banks established security affiliates that floated bond issues and underwrote corporate stock issues. (In underwriting, a bank guarantees to furnish a definite sum of money by a definite date to a business or government entity in return for an issue of bonds or stock.) The expansion of commercial banks into securities underwriting was substantial until the 1929 Stock Market crash and the subsequent Depression. In 1930, the Bank of the United States failed, reportedly because of activities of its security affiliates that created artificial conditions in the market. In 1933, all of the banks throughout the country were closed for a four-day period, and 4,000 banks closed permanently.

As a result of the bank closings and the already devastated economy, public confidence in the U.S. financial structure was low. In order to restore the banking public's confidence that banks would follow reasonable banking practices, Congress created the Glass-Steagall Act. The act forced a separation of commercial and investment banks by preventing commercial banks from underwriting securities, with the exception of U.S. Treasury and federal agency securities, and municipal and state general-obligation securities. More specifically, the act authorizes Federal Reserve banks to use government obligations and Commercial Paper as collateral for their note issues, in order to encourage expansion of the currency. Banks also may offer advisory services regarding investments for their customers, as well as buy and sell securities for their customers. However, information gained from providing such services may not be used by a bank when it acts as a lender. Likewise, investment banks may not engage in the business of receiving deposits.

A bank is defined as an institution organized under the laws of the United States, any state of the United States, the District of Columbia, any territory of the United States, Puerto Rico, Guam, American Samoa, or the Virgin Islands, that both accepts demand deposits (deposits that the depositor may withdraw by check or similar means for payment to third parties or others) and is engaged in the business of making commercial loans (12 U.S.C.A. § 1841 (c)(1) [1988]). Investment banking consists mostly of securities underwriting and related activities; making a market in securities; and setting up corporate mergers, acquisitions, and restructuring. Investment banking also includes services provided by brokers or dealers in transactions in the secondary market. A secondary market is one where securities are bought and sold subsequent to their original issuance.

Despite attempts to reform Glass-Steagall, the legislature has not passed any major changes—although it has passed bills that relax restrictions. Banks may now set up brokerage subsidiaries, and underwrite a limited number of issues such as asset-backed securities, corporate bonds, and commercial paper.

The Glass-Steagall Act restored public confidence in banking practices during the Great Depression. However, many historians believe that the commercial bank securities practices of the time had little actual effect on the already devastated economy and were not a major contributor to the Depression. Some legislators and bank reformers argued that the act was never necessary, or that it had become outdated and should be repealed.

Congress responded to these criticisms in passing the Gramm-Leach-Bilely Act of 1999, which made significant changes to Glass-Steagall. The 1999 law did not make sweeping changes in the types of business that may be conducted by an individual bank, broker-dealer or insurance company. Instead, the act repealed the Glass-Steagall Act's restrictions on bank and securities-firm affiliations. It also amended the Bank Holding Company Act to permit affiliations among financial services companies, including banks, securities firms and insurance companies. The new law sought financial modernization by removing the very barriers that Glass-Steagall had erected.

Further readings

Cintron, Ivan. 1995. "Bankers Hope Reform Helps Shatter Glass." Nashville Business Journal (September 4).

Class, Edgar. 1995. "The Precarious Position of the Federal Deposit Insurance Corporation after O'Melveny and Myers v. FDIC." Administrative Law Journal of the American University (summer).

Eaton, David M. 1995. "The Commercial Banking-related Activities of Investment Banks and Other Nonbanks." Emory Law Journal (summer).

Feibelman, Adam. 1996. "The Dukes of Moral Hazard." Memphis Business Journal (July 1).

Smoot, James R. 1996. "Financial Institutions Reform in the Wake of Valic." Creighton Law Review (February).

Sullivan, Edward D. 1995. "Glass-Steagall Update: Proposals to Modernize the Structure of the Financial Services Industry." Banking Law Journal 112 (November– December).

"U.S. Bank Law Overhaul Not Provoking Big Changes—Meyer." 2001. Reuters Business Report (February 15).

Woeful, Charles J., 1994. Encyclopedia of Banking and Finance. 10th ed. Chicago: Dearborn.


Banks and Banking; Federal Reserve Board; Glass, Carter.

West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.
References in periodicals archive ?
The chairman also said there was a possibility that the House would pass legislation this year to reform the Glass-steagall Act. Enacted during the Great Depression to restrict the securities activities and affiliations of banks, Glass-Steagall has long been seen as having separated commercial banking from investment banking, an arrangement Leach said was "irrational" to continue.
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To make a case about the consequences of underregulation, an analogy can be drawn to the Glass-Steagall Act, which the federal government passed in 1933 to establish different regulatory agencies in the financial sector aimed at ensuring that the bank failures that triggered the Great Depression would never happen again.
ReliaStar said the repeal of the Glass-Steagall Act allows it to own a national bank limited to trust powers without being regulated as a bank holding company.
Company currently engages in limited underwriting and dealing in certain types of bank-ineligible securities(2) as permitted under section 20 of the Glass-Steagall Act (12 U.S.C.
Claiming to spot a loophole in the Glass-Steagall Act, the Fed has casually accommodated the commercial banks, which have been lusting for more than half a century to regain the fat fees generated by underwriting new stock issues or by their wholesale distribution.
under the Glass-Steagall Act. The 50-year-old legislation prevents financial institutions from operating both commercial banks and securities underwriting firms in the U.S., and the potential repeal of Glass-Steagall has proceeded slowly since the October, 1987, market crash.
What she's describing is a kind of Glass-Steagall Act [which separated lending banks from investment banks] for financial advisors; that would create a clear distinction between fiduciary advisors and retail brokers.