The bankruptcy of thousands of banks in the first years of the Great Depression deeply shaken the confidence in the banking sector. Glass-Steagall Law was created to restore this trust in 1933, separated investment and deposit banks. With the Glass-Steagall Act, banks that manage customer accounts and provide loans are prohibited from creating a deposit fund for risky assets. Also, it is the law that enables the insurance sector to separate from banking.
Glass-Steagall Act Regulations
In addition to being speculative in the pre-depression era, commercial banks organized the sale of stocks called public offerings. That is caused banks to take more significant risks for bigger gains. Glass-Steagall Act aimed to prevent the risk activities of commercial banks. He encouraged the government to provide deposit insurance to banks and ensured that these banks were supported. Thus, it enabled investment banking without risking deposit accounts and prevented significant economic crises.
Other regulations under the Glass-Steagall Act are as follows:
- Bank officials were prohibited from borrowing large amounts from their banks.
- The Federal Reserve was given the power to regulate retail banks. For the Fed to enforce regulations better, a Federal open market committee was created.
- Forbade investment banks from having controlling shares in deposit banks.
History of Glass-Steagall Act
The Glass-Steagall law was first introduced in January 1932 by US Senator Carter Glass, a Democrat from Virginia. He passed the Senate in May 1933. President Roosevelt saw the deal as a solution to restoring confidence in banking systems. He signed this law, which included various measures, on June 16, 1933. From the 1970s, large banks began to withdraw the Glass-Steagall Act's regulations because it reduced their competition with foreign securities firms.
In 1987, Federal Reserve Chairman Alan Greenspan complied with the view that allowing banks to make investment strategies could increase customer income by preventing risk activities. In 1933, also was created Federal Deposit Insurance (FDIC). Shortly after, differences of opinion created ambiguity in the law. In the towards of these uncertainties, banks violated the limits set by the law. The Act was repealed in 1999.
The Federal Deposit Insurance Corporation (FDIC)
Glass-Steagall Act created a safety net by separating commercial banks and investment banks. The Federal Deposit Insurance Company, the Federal Deposit Insurance Company, was created, containing Glass-Steagal provisions and Dodd-Frank Act. The Federal Deposit Insurance Corporation aimed to protect customer deposits at commercial banks.
The FDIC is the institution responsible for ensuring the security of the money you deposit in the Bank. Deposit investments applied by banks to generate income, including loans given to customers and stocks, may increase the risk level or may not meet the customer's demands who deposited money in the Bank. In case of such a situation, the FDIC, which protects customer investments, steps in.
The Future of The Glass-Steagall Act and The Volcker Rule
It has been discussed at length whether the Glass-Steagall Law should be brought back or not. It includes A series of measures to prevent risky banking activities and a possible financial crisis. With the 2008-09 banking crisis, many steps were taken to re-take these measures. Therefore many significant efforts have been made to massively restructure the banking sector, led by the Glass-Steagall Act.
Thus, Congress enacted the Volcker Rule, part of the Dodd-Frank Act, signed in 2010 to revive the impact of Glass-Steagall laws. The Volcker Rule has imposed restrictions on banks 'ability to use depositors' funds for risky investments. It does not require them to change the organizational structure. If a bank is large enough to fail, the Dodd-Frank Federal Reserve will need regulations.