Today is a small celebration for us at Better Banking Law, as it marks the first of many posts on the subject of bank reform. Your comments and questions are always welcome, with the hope that together, we can contribute meaningful dialogue to this important movement.
Yesterday, June 16th, we celebrated the 82nd Birthday of the Banking Act of 1933 aka Glass-Steagall. The Act served the nation extremely well for 66 years by: (1) creating Federal deposit insurance; and (2) separating commercial banking from investment banking. Unfortunately, the separation part of the Act was repealed in 1999, permitting Federally insured banks to engage in investment banking, i.e. securities underwriting and trading. That repeal contributed greatly to the nation’s financial Armageddon in 2008 which required U.S. taxpayers to bailout the banking industry. America is still recovering from that disaster.
Tomorrow, June 18th, is the 25th Anniversary of the publication in Investment Dealer’s Digest of an interview with Robert Downey, the Founder of Better Banking Law, who was then Chairman of the Securities Industry Association (SIA). In the interview, Mr. Downey described the SIA Plan which would have permitted subsidiaries of Bank Holding Companies (BHCs) to engage in securities underwriting and trading. However, those separately capitalized investment banking subsidiaries must succeed or fail on their own and would be completely separated (ring fenced) from the BHC’s Federally insured commercial banking subsidiaries. Commercial banks had been eager to enter the securities business and had constantly advocated for the repeal of Glass-Steagall. However, if commercial banks were to participate in the risky, cyclical securities business, there was a need for Congress to adopt a law in a way that would be safe and fair, while keeping federal deposit insurance (and Uncle Sam) separate. The SIA Plan accomplished those goals.
Aside from the re-enactment of the full Glass-Steagall Act, the SIA Plan (with some minor updating), if enacted into law, would be the best method to prevent future bailouts of the nation’s banking system and to end once and for all the concept of Too Big To Fail.