Glass-Steagall Act

Definition

The Glass-Steagall Act was a landmark piece of legislation enacted in 1933 that separated commercial banking from investment banking in the United States. This law aimed to restore public confidence in the banking system after the Great Depression by preventing banks from engaging in speculative activities that could jeopardize depositors' savings. The act played a crucial role in shaping the structure of the financial services industry and has had lasting implications on banking regulation.

5 Must Know Facts For Your Next Test

1. The Glass-Steagall Act was part of the New Deal reforms introduced by President Franklin D. Roosevelt to address the financial instability of the Great Depression.
2. The act established the Federal Deposit Insurance Corporation (FDIC), which insured bank deposits and helped restore trust in the banking system.
3. Provisions of the Glass-Steagall Act were gradually eroded beginning in the 1980s, leading to its eventual repeal in 1999 through the Gramm-Leach-Bliley Act.
4. By separating commercial and investment banking, the Glass-Steagall Act aimed to reduce conflicts of interest and protect consumers from risky financial practices.
5. The repeal of the Glass-Steagall Act is often cited as a contributing factor to the 2008 financial crisis due to increased risk-taking among banks.

Review Questions

• How did the Glass-Steagall Act impact consumer confidence in the banking system during its enactment?
  • The Glass-Steagall Act significantly boosted consumer confidence in the banking system after the chaos of the Great Depression. By separating commercial banking from investment banking, it assured depositors that their savings would not be put at risk through speculative investments. The establishment of the FDIC provided additional security by insuring deposits, making people feel safer about keeping their money in banks.
• Discuss how the repeal of the Glass-Steagall Act affected the risk profile of American banks and contributed to financial instability.
  • The repeal of the Glass-Steagall Act in 1999 led to a significant shift in how American banks operated, allowing them to engage in both commercial and investment banking activities. This merging of functions resulted in increased risk-taking, as banks pursued higher profits through speculative investments without adequate oversight. The lack of separation between these two types of banking created conflicts of interest and ultimately contributed to systemic risks that played a role in the 2008 financial crisis.
• Evaluate the relevance of reinstating elements of the Glass-Steagall Act in today's financial landscape, considering recent economic events.
  • Reinstating elements of the Glass-Steagall Act has become a topic of debate following recent economic events like the 2008 financial crisis and subsequent regulatory failures. Proponents argue that re-separating commercial and investment banks would mitigate risks associated with speculative trading and protect consumer interests. On the other hand, opponents claim that modern financial markets are more complex and interconnected than those in the past, suggesting that a full return to Glass-Steagall may not be feasible or effective without considering new regulatory frameworks that address today's challenges.

Related terms

Commercial Banking: A type of financial institution that provides services such as accepting deposits, providing business loans, and offering checking and savings accounts to individuals and businesses.

Investment Banking: A segment of the banking industry that focuses on underwriting, facilitating mergers and acquisitions, and providing advisory services for corporate financing, often involving high-risk investments.

Dodd-Frank Act:

A comprehensive financial reform law enacted in 2010 aimed at reducing risks in the financial system following the 2008 financial crisis, which included measures to address issues previously handled by the Glass-Steagall Act.