Could Glass Steagall Act be Reinstated Soon?

glassTightening of financial regulations in the US is at the center stage of this year’s US presidential elections campaign. Both the democrats and the republicans seem to be reading from the same script on some of the proposed policy changes that are meant to strengthen the US financial sector, reduce its risk exposure and build its capacity to absorb any external or internal economic shocks. One such financial regulation policy enforcement that appears to have support from both the democrats and the republicans’ camps is the return of the Glass Steagall Act of 1933. The Act however only focuses on the commercial and investment banking businesses and does not touch on forex markets. This therefore means regardless of whoever gets into the White House, investors can get online forex trading accounts with firms such as ETX Capital and invest their money there without any disruptions.

Donald Trump form the republicans’ camp has made it clear that under his presidency the Glass Steagall Act would be reinstated; while Senator Bernie Sanders also is advocating for the same from the democrats’ side. The similarity in campaign messages is not a coincidence. Many working class Americans have been complaining about how Wall Street is negatively influencing the economic development of the US; and hence all presidential aspirants would like to appeal to the masses by siding with them in their grievances.

History of the Glass Steagall Act

The Glass Steagall Act was passed by the US Congress in 1933 with an aim of separating commercial banking practices from the investment banking practices. The bill was sponsored by Senator Carter Glass of Virginia and a former Treasury Secretary together with Representative Henry Steagall of Alabama and chairman of the House Banking and Currency Committee. The bill was passed into law after the great recession of 1929 in order to tame the businesses of big commercial banks that were directly linked to the financial crisis that led to the global recession that followed later on.

The Act was meant to control operations of the more than 5,000 banks then and prevent them from falling due to the recession. It also sought to restore confidence of the American people into the US banking system through controlling excessive speculative investment banking activities by commercial banks using depositors’ money.

In addition to separating the commercial banking and investment banking businesses for the big banks then, the Act also created the Federal Deposit Insurance Corporation. The FDIC was meant to guarantee bank deposits to some level such that incase a bank was liquidated, depositors would then get a refund of a given percentage of their deposits from the FDIC. The Act further created the Federal Open Market Committee and led to the introduction of Regulation Q which restricted banks from paying interest on demand deposits and capped interest rates on other bank deposits.

Repealing of the Glass Steagall Act

Later on the Glass Steagall Act was repealed in 1999 as the separation between commercial and investment banking was considered controversial. The repealing of the Act was however blamed for the 2008 global financial crisis; when the excessive investment banking speculations led to creation of subprime mortgages which led to a housing bubble that burst in the same year. The 2008 financial crisis led to the collapse of Lehman Brothers and some of the big banks such as Goldman Sachs and Morgan Stanley converted into holding companies. In addition, other investment banks such as Merrill Lynch and Bear Sterns were acquired by leading commercial banks Bank of America and JP Morgan respectively.

Why Wall Street is unhappy with Glass Steagall Reinstatement

The proponents of the reinstatement of the Glass Steagall Act are now using the 2008 recession as their example as to why they want the Act to be brought back. Having experienced the pains of the 2008 global recession, many Americans are therefore willing to bite into the bait of reinstating the Act in order to ensure the financial markets in the US are secured from excessive risk exposure from the bankers.

However, Wall Street is not happy with the proposed policy change. Essentially what the Act will do is breaking the big banks into smaller ones as they separate the commercial banking and the investment banking businesses. This will first reduce earnings for the formerly big banks and second it will make them lose their “Too Big to Fail” tittle that helped them get bailed out by the US government during the 2008 recession.

Whether Glass Steagall Act will be reinstated is still subject to debate based on who actually gets into the White House after November 8th. If Donald Trump wins the election then there are higher chances of the Act being brought back. However, if Hillary Clinton clinches the sit, then it might take some convincing from Bernie Sanders and his supporters to get her to reinstate it.