Did the “Repeal” of Glass-Steagall Have Any Role in the Financial Crisis? Not Guilty. Not Even Close

Abstract

The law that separates investment banking from commercial banking, popularly known as the Glass-Steagall Act, initially consisted of only four short statutory provisions. Section 16 generally prohibited banks from underwriting or dealing in securities,¹ and Section 21 prohibited securities firms from taking deposits.² The remaining two sections, 20³ and 32,⁴ prohibited banks from being affiliated with firms that are principally or primarily engaged in underwriting or dealing in securities. The Gramm-Leach-Bliley Act of 1999 (GLBA) repealed Sections 20 and 32, so that banks could thereafter be affiliated with securities firms; but Section 16 was left intact, so that whatever banks were forbidden or permitted to do by Glass-Steagall—before the enactment of the GLBA—remained in effect. The fact that Glass-Steagall, as it relates to banks, remains in full force and still governs the securities activities of banks is apparently not generally known. Those who blame the financial crisis—and specifically the weak financial condition of banks—on the “deregulation” of Glass-Steagall or the GLBA, seem to have only a fuzzy idea of what deregulation they are talking about. When challenged for specifics, they generally cite the “repeal” of Glass-Steagall. This chapter is intended to demonstrate that the significant elements of Glass-Steagall—those that apply to banks—were never repealed, and thus that neither the financial problems of banks, nor the financial crisis itself, can be blamed on the GLBA’s supposed “repeal” of Glass-Steagall.

This chapter also appeared as Networks Financial Institute Policy Brief 2009-PB-09.