Bank separation law returns to American congress
The Return of Glass-Steagal comes from Democrats and Republicans
Early last month in the United States, Republican John McCain and Democrat Elizabeth Warren announced that they were going to work together to pass a new version of the Glass-Steagall Act, otherwise known as the Banking Act of 1933.
For the Americans, and the rest of the world by extension, this is a big deal. Simply put, the law is meant to separate investment and traditional banks from each other. This means that risk-taking investment banks cannot access commercial banks’ chequing and savings accounts. It can be easily argued that this malleability between banks was one of the direct causes of the 2008 credit crunch.
Originally, the Glass-Steagall Act was passed in 1933 after the Great Depression, also by a Republican and a Democrat. Elizabeth Warren, in an interview with business news channel CNBC, argued that after 1933, “We had 50 years following the passage of Glass-Steagall, in which we had a tiny number of bank failures. That whole boom and bust cycle from 1797 to 1933 went away. In that period of time, we built a strong and robust middle class. What happened is, we started chipping away, and part of the chipping away of that was loading up the banks with more and more risk, get them more and more integrated and get them bigger and bigger.”
What Warren was referring to was the beginning of “Reaganomics” and the political culture of de-regulation. Before Ronald Reagan was elected president of the United States, the country was experiencing a decade of stagflation, or increased unemployment in combination with inflation. Reagan addressed this with further deregulation, and tax cuts that greatly benefited the wealthiest one per cent.
The last breath of Glass-Steagall was in 1999, when Bill Clinton signed the Gramm–Leach–Bliley Act into law. It allowed any one institution to act as investment bank, commercial bank and insurance company. Such legislation made way for the expansion of banks that were “too big to fail.”
Thus, most of the Glass-Steagall legislation was gone, and risk taking investment banks had access to savings accounts covered by FDIC insurance, which protects regular people up to $250,000 in the event that a bank failure occurs. Such a program is similar to the Canadian version, the Canadian Deposit Insurance Corporation.
In Canada, it’s illegal for banks to take such risky maneuvers. RBC Capital Markets doesn’t get to touch your RBC account, unless you have something arranged with them. Same for BMO Capital Markets and TD Securities. This is because we have more regulation in Canada in regards to banking, and you can tell when you compare our economic performance to American and World performance in 2008. This has to do with the Bank Act, which prevents banks from getting too big and separates bank into different tiers. Schedule I banks are the big ones that you likely have an account with: TD, RBC, Scotia, BMO, CIBC. These banks are tightly regulated, and are only entitled to help from the Bank of Canada.
Ultimately, these are the first murmurs of financial reform, and it’s hard to say whether or not anything will come from this, but it’s reassuring to see American politicians coming together from both sides of the aisle. A lack of regulation and unchecked risk-taking are among the reasons the United States fell into dire economic straits back in 2008.
