A bipartisan group of U.S. senators is proposing legislation that could reshape the U.S. financial services sector by once again requiring the separation of retail banking from investment banking.
Specifically Democrats Elizabeth Warren and Maria Cantwell, Republican John McCain and independent senator, Angus King, are proposing to create a modern day version of the Glass-Steagall Act.
The original legislation was adopted in the wake of stock market crash of 1929 in an effort to insulate traditional retail banking activities from riskier financial services, such as investment banking and trading. However, the core provisions of Glass-Steagall were eroded over time in response to financial industry pressure, allowing the creation of integrated financial giants.
The new bill aims to recreate that division between traditional deposit-taking activities and riskier businesses to protect commercial banks and credit unions, and to reduce the likelihood of future taxpayer bailouts.
According to the senators, the new legislation would once again mandate the separation of traditional retail banks from financial firms that are engaged in riskier activities, such as investment banking, hedge fund and private equity trading, and derivatives dealing.
“Since core provisions of the Glass-Steagall Act were repealed in 1999, a culture of excessive risk-taking has taken root in the banking world, placing the financial security of millions of hardworking American taxpayers at risk,” said McCain in a statement announcing the new bill.
“Even with the thousands of pages of misguided and burdensome regulations imposed by Dodd-Frank in the wake of the 2008 financial crisis, there are indications that this culture of risky behavior continues today,” he added. “That’s why I believe it’s critical for Congress to reinstate the protections that separated main street banks and investment banks. Our 21st Century Glass-Steagall Act of 2017 would return banking ‘back to the basics’ and go far to restore Americans’ confidence in the banking system.”
“Despite the progress since 2008, the biggest banks continue to threaten our economy,” added Warren in a statement. “For 50 years, the original Glass-Steagall Act helped produce broad-based economic growth and avoid any major financial crisis. The 21st Century Glass-Steagall Act will re-establish the wall between commercial and investment banking and make our financial system more stable and secure. Reinstating Glass-Steagall has broad bipartisan support, and it’s time to get it done.”
The so-called, 21st Century Glass-Steagall Act, reportedly has support from the new U.S. administration, including U.S. President Trump, the U.S. Treasury secretary, Steve Mnuchin, and Gary Cohn, director of the U.S. National Economic Council.
Photo copyright: suringaw/123RF