On the Tenth Anniversary of Its Repeal, ‘21st Century Glass-Steagall Act’ Needed Says Policy Center Demos

WASHINGTON--(BUSINESS WIRE)--Ten years ago this Thursday, a Republican-led Congress and a Democratic White House ushered in an era of global, “full service,” too-big-to-fail financial institutions. The move repealed the Glass-Steagall Act of 1933, a set of reforms responsible for the longest crisis-free period in U.S. financial history. This capstone of a more than 20-year effort to dismantle financial industry regulation led to a sharp rise in bank risk taking, a speculation bubble, and ultimately the recent near-collapse of the industry, and with it the US economy.

“Six Principles for True Systemic Risk Reform”

To mark this anniversary, the national policy center Demos has published two new papers detailing the importance of the Glass-Steagall Act’s commercial and investment banking firewalls in ushering in finance-industry stability and the impact of its repeal, as well as a roadmap for true systemic risk reform. The background and recommendations detailed in the publications, as well as recent efforts in the U.K. to break up large banks and Senator Dodd’s banking reform bill introduced in Congress today, are the backdrop of a 1:30 press teleconference held by Demos addressing Glass-Steagall and the future of banking industry reform.

“It’s time for a modern-day Glass-Steagall. The best way to end ‘too big to fail’ is to draw a bright line between regular bank activities – which the government should facilitate — and speculative risk-taking, which neither benefits nor should burden the average taxpayer,” said Tamara Draut, Vice President of Policy and Programs at Demos.

The first publication, “A Brief History of the Glass-Steagall Act,” details the following:

--The history of Glass-Steagall and the speculation bubble of the ‘20s that led to the crash of ’29, the widespread bank failures and massive depositor losses, and the securities fraud committed by banks like National City (now Citibank) and JP Morgan (now JPMorgan Chase) that led to the Act’s prohibitions on investment activities by banks.

--Glass-Steagall’s impact over time and how it ended the cycle of financial panics that had destabilized the US economy since the Civil War, led to widespread banking stability and depositor confidence, and ultimately the Bank Holding Act of 1956 that prevented banks from underwriting insurance (which, had it remained enforced, would have prevented the AIG meltdown).

--The financial deregulation craze and the demise of Glass-Steagall. By the early 1980s, anti-regulation forces dominated Washington, and even amid the S&L crisis continued to weaken crucial protections. Banks were allowed to underwrite a range of securities, as they had done in the 1920s. The Act was further weakened in the early ‘90s and ultimately repealed in 1999 with the Gramm-Leach-Blilely bill, passed with bipartisan support on November 12^th, 1999, and fueled by hundreds of millions of dollars of banking lobby money.

“The deregulatory revolution has been a colossal and expensive failure,” said Nomi Prins, a Demos senior Fellow and co-author of the publications, as well as the new book “It Takes a Pillage: Behind the Bailouts, Bonuses and Backroom Deals from Washington to Wall Street.” “It opened the floodgates for dangerous combinations of mega-banks, insurance companies and investment institutions, fueled by cheap loans from the Federal Reserve and other government subsidies, and drove the frenzied development of toxic assets and derivatives. Today's bank profits should not be construed as signs of lasting stability, but of an urgent need for strong restructuring of the banking landscape."

In its “Six Principles for True Systemic Risk Reform” Policy Brief, Demos outlines crucial steps to brings stability to the banking industry, including:

-- Resurrect the Glass-Steagall firewall by preventing bank holding companies from engaging in investment activities above 10 percent of income.

--Restrict proprietary and off-sheet balance trading.

--Lower the leverage limit of financial institutions and increasing the capital reserve requirement.

--Increase banking competition to promote the viability of smaller banks that can’t get “Too Big to Fail.”

--Democratize and make transparent the governance of the Federal Reserve to ensure proper regulatory oversight

--Protect consumers, investors and the banking system with a robust Consumer Financial Protection Agency and comprehensive regulation of the shadow banking sector.

“Recent legislative steps are promising,” said Heather McGhee, Director of Demos' Washington, DC, Office. “They show that members of Congress share our goal of a safer banking system. We look forward to working with them to ensure that a modern-day Glass Steagall—with the segregation of investment and commercial banks—is on the table ”

For more information about Glass-Steagall and financial industry reform, and to download these two new publications as well as a comprehensive bank bailout and subsidization tally, visit www.demos.org.