Issue Position: Banking Laws

Issue Position

Issue Position: Banking Laws

In 1933, in the wake of the 1929 stock market crash and during a nationwide commercial bank failure and the Great Depression, two members of Congress put their names on what is known today as the Glass-Steagall Act (GSA). This act separated investment and commercial banking activities. At the time, "improper banking activity", or what was considered overzealous commercial bank involvement in stock market investment, was deemed the main culprit of the financial crash.

Commercial banks were accused of being too speculative in the pre-Depression era, not only because they were investing their assets but also because they were buying new issues for resale to the public. Thus, banks became greedy, taking on huge risks in the hope of even bigger rewards. Banking itself became sloppy and objectives became blurred. Unsound loans were issued to companies in which the bank had invested, and clients would be encouraged to invest in those same stocks.

As a collective reaction to one of the worst financial crises at the time, the GSA set up a regulatory firewall between commercial and investment bank activities, both of which were curbed and controlled.

1956, Congress made another decision to regulate the banking sector. In an effort to prevent financial conglomerates from amassing too much power, the new act focused on banks involved in the insurance sector. Congress agreed that bearing the high risks undertaken in underwriting insurance is not good banking practice. Thus, as an extension of the Glass-Steagall Act, the Bank Holding Company Act further separated financial activities by creating a wall between insurance and banking. Even though banks could, and can still can, sell insurance and insurance products, underwriting insurance was forbidden.

The Glass-Steagall Act (GSA) was repealed by congress in 1999. In less than 10 years our banking industry and stock market crashed once again. Had we remembered history and why the GSA was needed, we could have avoided much of the collapse of our economy. After the GSA was ratified in 1933, there was not a "TOO BIG TO FAIL" banking system.

I propose to you, to re-establish a new version of the Glass-Steagall ACT to halt the "TOO BIG TO FAIL" mentality. Let banks stand on their own, and the stock market and loan industry stand alone.

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