Legislation aims to Reboot Banking

21st Century Glass-Steagall Act would once again separate traditional banks from investment banks
By MainStreet Team ,

By Hal M. Bundrick

NEW YORK (

MainStreet

)--An effort to reboot the banking system is underway with bipartisan legislation that would circle-back to prior regulation mandating a firewall of protection in bank structure. The 21st Century Glass-Steagall Act, an update to the Banking Act of 1933, would bring "banking back to the basics" by separating traditional banks offering savings and checking accounts that are insured by the Federal Deposit Insurance Corporation from riskier services such as structured and synthetic financial products, including complex derivatives and swaps.

Senators John McCain (R-AZ), Elizabeth Warren (D-MA), Maria Cantwell (D-WA), and Angus King (I-ME) are sponsoring the legislation that would return the American banking system to its pre-1999 structure. The proponents of the bill say the act would reduce risk in the financial system, decreasing the likelihood of future financial crises and would make "Too Big to Fail" institutions smaller and safer.

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"Since core provisions of the Glass-Steagall Act were repealed in 1999, shattering the wall dividing commercial banks and investment banks, a culture of dangerous greed and excessive risk-taking has taken root in the banking world," said Senator McCain. "Big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured deposits. If enacted, the 21st Century Glass-Steagall Act would not end Too-Big-to-Fail. But, it would rebuild the wall between commercial and investment banking that was in place for over 60 years, restore confidence in the system, and reduce risk for the American taxpayer."

"Despite the progress we've made since 2008, the biggest banks continue to threaten the economy," Senator Warren said. "The four biggest banks are now 30% larger than they were just five years ago and they have continued to engage in dangerous, high-risk practices that could once again put our economy at risk. The 21st Century Glass-Steagall Act will reestablish a wall between commercial and investment banking, make our financial system more stable and secure, and protect American families."

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The original Glass-Steagall legislation was initiated after the stock market crash of 1929, separating depository banks from investment banks. Beginning in the 1980s, regulators at the Federal Reserve and the Office of the Comptroller of the Currency reinterpreted longstanding policies that eventually removed the barriers between investment and depository banking. In 1999 Congress passed the Gramm-Leach-Bliley Act to repeal the core provisions of Glass-Steagall.

--Written by Hal M. Bundrick

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