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Glass-Steagall Act

Definition

The Glass–Steagall legislation describes four provisions of the U.S.A Banking Act of 1933 separating commercial and investment banking. The article 1933 Banking Act describes the entire law, including the legislative history of the provisions covered here.

The Glass-Steagall Act also known as the Banking Act of 1933 was sponsored by two US senators, Carter Glass and Henry Steagall of the US congress in 1933, in the wake of the 1929 stock market crash. The objective of the Glass-Steagall Act was to separate commercial banking from investment banking. The Glass-Steagall Act was a collective reaction which was brought about to curb ‘improper banking activities’ or the involvement of commercial banks in stock market investment, which was considered to be the main cause of the financial crash at the time.

Logic Behind the Glass-Steagall Act

At the time, around 5000 commercial banks in the US were accused of becoming too greedy by taking on huge amounts of risks in the hope of getting higher rewards. This resulted in their operations becoming sloppy and their objectives becoming more blurred than ever before. It was during this time that loans that were unsound were being issued to companies in the hopes of bigger rewards. What made the situation worse was not only the bad investments that were being made by the banks, but these banks were also encouraging their clients to invest in those same stocks as well.

To take control of this problem the Glass-Steagall Act was introduced as a sort of regulatory firewall between the activities of commercial and investment banks. According to the act, banks were given a time period of one year to decide whether they wanted to specialize in commercial or investment banking after which they would have to operate under the new rules that were set up by the Glass-Steagall Act. The purpose of the barrier was to prevent banks from using deposits in the case of a underwriting job that failed.

According to some financial experts, the repeal of the act in 1999 is the main cause of the credit crisis that hit many countries in 2008. During the credit crash, commercial banks from around the world found themselves straddled with billions in losses because of excessive exposure of their investment banking division to securities and derivatives that were directly tied to home prices in the US.

Coupled with the acquisition of several prominent banks and the conversion of independent investment banks into bank holding companies, the financial crisis of 2008 signaled the demise of the Glass-Steagall Act.


Further Reading


The repeal of the Glass-Steagall Act and the current financial crisis
clutejournals.com [PDF]
Abstract The Glass-Steagall Act was passed in 1933 in response to the failure of the banks following the Great Depression. One out of every five banks failed in the aftermath of the stock market crash. Legislators and regulators questioned the role the underwriting of …

Policy watch: The repeal of Glass-Steagall and the advent of broad bankingPolicy watch: The repeal of Glass-Steagall and the advent of broad banking
www.aeaweb.org [PDF]
Abstract The Glass-Steagall Act was passed in 1933 in response to the failure of the banks following the Great Depression. One out of every five banks failed in the aftermath of the stock market crash. Legislators and regulators questioned the role the underwriting of …

Banking, politics and global financeBanking, politics and global finance
ideas.repec.org [PDF]
Abstract The Glass-Steagall Act was passed in 1933 in response to the failure of the banks following the Great Depression. One out of every five banks failed in the aftermath of the stock market crash. Legislators and regulators questioned the role the underwriting of …

Derivatives and deregulation: Financial innovation and the demise of Glass–SteagallDerivatives and deregulation: Financial innovation and the demise of Glass–Steagall
journals.sagepub.com [PDF]
Abstract The Glass-Steagall Act was passed in 1933 in response to the failure of the banks following the Great Depression. One out of every five banks failed in the aftermath of the stock market crash. Legislators and regulators questioned the role the underwriting of …

The Glass–Steagall Act in historical perspectiveThe Glass–Steagall Act in historical perspective
www.sciencedirect.com [PDF]
Abstract The Glass-Steagall Act was passed in 1933 in response to the failure of the banks following the Great Depression. One out of every five banks failed in the aftermath of the stock market crash. Legislators and regulators questioned the role the underwriting of …

Is the Glass-Steagall Act justified? A study of the US experience with universal banking before 1933Is the Glass-Steagall Act justified? A study of the US experience with universal banking before 1933
www.jstor.org [PDF]
Abstract The Glass-Steagall Act was passed in 1933 in response to the failure of the banks following the Great Depression. One out of every five banks failed in the aftermath of the stock market crash. Legislators and regulators questioned the role the underwriting of …

Organization structure and credibility: Evidence from commercial bank securities activities before the Glass-Steagall ActOrganization structure and credibility: Evidence from commercial bank securities activities before the Glass-Steagall Act
www.sciencedirect.com [PDF]
Abstract The Glass-Steagall Act was passed in 1933 in response to the failure of the banks following the Great Depression. One out of every five banks failed in the aftermath of the stock market crash. Legislators and regulators questioned the role the underwriting of …

Before the Glass-Steagall Act: An analysis of the investment banking activities of national banksBefore the Glass-Steagall Act: An analysis of the investment banking activities of national banks
www.sciencedirect.com [PDF]
Abstract The Glass-Steagall Act was passed in 1933 in response to the failure of the banks following the Great Depression. One out of every five banks failed in the aftermath of the stock market crash. Legislators and regulators questioned the role the underwriting of …

The erosion of the Glass–Steagall Act:: Winners and losers in the banking industryThe erosion of the Glass–Steagall Act:: Winners and losers in the banking industry
www.sciencedirect.com [PDF]
Abstract The Glass-Steagall Act was passed in 1933 in response to the failure of the banks following the Great Depression. One out of every five banks failed in the aftermath of the stock market crash. Legislators and regulators questioned the role the underwriting of …

Democracy and productivity: The glass-steagall act and the shifting discourse of financial regulationDemocracy and productivity: The glass-steagall act and the shifting discourse of financial regulation
muse.jhu.edu [PDF]
Abstract The Glass-Steagall Act was passed in 1933 in response to the failure of the banks following the Great Depression. One out of every five banks failed in the aftermath of the stock market crash. Legislators and regulators questioned the role the underwriting of …



Q&A About Glass-Steagall Act


Was there any opposition to repealing Glass-Steagall Section's 2 and 32?

Yes, President Clinton stated that this repeal would enhance stability of our financial services system by permitting financial firms to diversify their product offerings and thus their sources of revenue.

According to some financial experts, what caused the credit crisis that hit many countries in 2008?

The repeal of this act in 1999 is considered to be one cause of the credit crisis that hit many countries in 2008.

What is underwriting job?

Underwriting job is a financial activity where an investor buys securities from an issuer, such as a corporation or government, then resells them to raise cash for the issuer.

What is the Glass-Steagall Act?

The Glass-Steagall act was a law enacted by the United States Congress in 1933 as part of the Banking Act. It prohibited commercial banks from engaging in investment banking and insurance activities, and created firewalls to separate different kinds of banking businesses.

Who signed the GLBA into law?

Bill Clinton signed it into law on November 12, 1999.

What does it mean when it says that these underwriting jobs failed?

It means that they didn't make money for investors who bought them.

How many commercial banks were accused of being greedy?

Five commercial banks.

Why did the Glass-Steagall Act separate commercial and investment banks?

Commercial banks were accused of becoming too greedy by taking on huge risks in the hope of getting higher rewards. This resulted in their operations becoming sloppy and their objectives becoming blurred.

How did this change affect financial firms?

This allowed them to diversify their product offerings and thus their sources of revenue.

What was the Glass-Steagall Act?

The Glass-Steagall Act was a Banking Act of 1933 that separated commercial banking from investment banking.

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