Glass-Steagall Act

On June 16, 1933, President Roosevelt signed into law the widely debated Glass-Steagall Banking Act. Sponsored by Virginia’s U.S. Senator Carter Glass and Alabama’s U.S. Representative Henry Steagall, the Glass-Steagall Banking Act was one of the attempts to restore the American people’s confidence in the banking system. Congress knew the current banking system needed reform. They desired to restrict the use of bank credit for speculation and instead direct bank credit to more productive uses, such as agriculture, commerce, and industry.

The effects of the Depression during the 1930’s still impact America today. The New Deal was passed to rebuild the economy after the Great Depression. William L. Niemi and David J. Plante discussed the meaning of the new deal to our economy today, “Under the New Deal regime there were more labor rights, less Supreme Court intervention in the economy, more public accountability in the structure of financial institutions driving the political economy, and a more equitable distribution of wealth”(Plante, Niemi, 413-427). Franklin Roosevelt created the New Deal, which was his plan to take America out of the Depression. He had three goals: relief, reform, and recovery. The New Deal set up policies that help us prevent future economic depressions and achieve long-term recovery. Policies that still stand and affect our economy today are the Securities and Exchange Commissions (SEC) and the Federal Deposit Insurance Corporation (FDIC). The SEC today still regulates the stock market and enforces laws that protect the industry. The SEC was used to restore the nations confidence in the economy after the Depression. The FDIC is an important part of America’s financial system. The FDIC was part of the Banking Act of 1933. The FDIC insures banks with a certain amount of money to make it a safer place to put your money in. Roosevelt

In 1929 the Stock Market crashed was said to have “ushered in” the Great Depression. After Wall Street and the Stock Market crash of 1929, the banks began to fail. By 1933 over half of the banks in the United States had failed and went out of business. The economy came to a full stop as businesses could no longer access credit lines to purchase inventory, checks were no longer accepted as currency due to the multitude of failing financial institutions which led to an unemployment rate reported to be as much as 30 percent of the available workforce. (“First measured century: Timeline,” n.d.)

Thus, the New Deal was implemented in order to provide relief and recovery as well as reform the US economy. One of these economic reforms involved the sale of securities which were previously not regulated at the federal level leading to a number of abuses. In response, FDR signed the Securities Act of 1933 to regulate the offer and sale of securities. In addition, the supporters of the New Deal also criticized the banking industry for its lack of transparency and control which was one the contributing factors to the Great Depression. Therefore, as part of the New Deal, the Banking Act of 1933 was passed in order to limit commercial bank securities activities, restrict speculative bank activities, and promote a federal system of bank deposit insurance.

Gov. Chafee and former Virginia Sen. Jim Webb had rather lackluster performances during the debate. Webb’s stand-out moments were his complaints of not being given enough time to answer, to which Cooper responded, “You agreed to these debate rules.” Gov. Chafee also faltered when Cooper asked about his 1999 vote to repeal Glass-Steagall, which Cooper explained to voters as the “Depression-era banking law repealed in 1999 that prevented commercial banks from engaging in investment banking and insurance activities.” Chafee said, “The Glass-Steagall was my very

The Great Recession and the Great Depression are the fallout of the exact same economic problems and are only different in a few respects. Each period is marked by a massive run ups in asset prices followed by a crash in the stock market and sent both debt and equity markets down. These periods are said to be the worse economic downturn in the country’s history. During the great depression, as banks failed and threatened to shut down the financial system altogether, President Franklin Roosevelt moved quickly and effectively to address the most dangerous financial crisis of the Great depression. The massive stock market collapse that began in October 1929 erased massive amounts of wealth and because many banks had invested heavily in the markets, and had lent recklessly to speculative investors, the banks found themselves without sufficient capital and in many cases without reserves. He created the New Deal which responded to an unemployment rate that had reached 25 percent, and in some cities as much as 75 percent. He signed the Emergency Banking Act, which allowed inspectors to evaluate troubled banks and decide whether or not they could reopen. The Glass-Steagall Act created a barrier between commercial and investment banking and established the Federal Deposit Insurance Corporation, which guaranteed that citizens would not lose their bank deposits even if a bank failed.

Financial historians have disputed the rational for reforming the banking system in the US as a result of the 1920s banking crisis. Calomiris (2010) argue that there may have been political self-interest incentives as to why the Glass-Steagall Act was enacted. Firstly Steagall had bargaining power as Chairman of the banking committee in the House of Representatives. Second, the Pecora Hearings populist politicians including Henry Steagall advocated in favour of small banks contributing in making large bank disliked amongst the public. And finally deposit insurance was introduced as a temporary system allowing for easy approval in the Congress.

1. a) A bank has risk-weighted assets of $175 and equity of $12.5. If regulators require a minimum risk-weighted capital ratio of 5% given the current level of equity, how many new assets with a 100% risk weight can the bank add? How many with a 50% risk weight? b) If the bank had 20% more equity, how many new assets with a 100% risk weight could the bank add? How many with a 50% risk weight? How does having more equity affect a bank's ability to grow? How is this growth affected by the riskiness of the bank's assets?

Even before FDR had taken his oath of office, the Glass-Steagall bill had been in the works. Representative Henry Steagall had proposed deposit insurance as a means of saving failed banks. This was not a new idea. Several states had initiated deposit insurance schemes in the 1920s, when bank failures were on the rise. During the depression, however, states lacked the capital resources to rescue their own state-chartered banks, to say nothing of the many smaller banks. Steagall realized that opposition to a federally insured deposit system would come from the large banks, which would resent parting with revenue for the sake of their weaker competitors. By the spring of 1933, however, even the major banks were willing to support this idea, rather

The Glass Steagall Act was passed on 1933, which is also known as The Banking Act to tighten regulation on the way banks did their business. This act was written as an emergency measure when about 5,000 banks failed during the Great Depression. Banks mostly failed because of the way they would invest with money. The act prohibits banks from investing money on investments that turn out to be risky. Banks could no longer sell securities or bonds. The act also created Federal Deposit Insurance Corporation (FDIC) to protect the deposits of individuals, which is still used to this date. The FDIC in this era insures your deposits in your bank up to $250,000. This gave the public confidence again to deposit their money in the bank. In 1933

The Great Recession of 2008 was one of the largest drops in the United States' economy since the Great Depression of the 1930's. The United States housing market peaked in 2006 and gradually began to deteriorate. Consequently, due to the degrading of the housing market, companies filed under bankruptcy and the economy collapsed in December 2007. A wide array of attributes led to the downfall and inevitable burst of the housing bubble in 2008. Two major factors of the downfall are the mortgage backed securities that were created with their own components and the repeal of the Glass - Steagall act that was repealed in 1999 by Bill Clinton.

The three types of capital mentioned in chapter 18 are, equity capital, economic capital, and regulatory capital. Equity capital, economic capital, and regulatory capital were established a capital standard for banks. Equity capital is defined as the book value of assets less the book value of liabilities. Furthermore, equity capital is also said to cushion debt and equity holders from unexpected losses. Regulatory capital includes the subordinated debt and some adjustments for off-balance sheet items. This is also different from economic capital, which is a statistical estimate of risk and capital, it also reflects the bank’s estimate of the amount of capital needed to support its risk-taking activities; it is not the amount of

Since the onset of the financial crisis 2008, the sovereign debt crisis in western economies and the new financial regulation with Basel III coming up, the financial industry faces the challenge of reinventing itself. The ring-fence for Commercial and Investment Banking, and new economic and regulatory capital requirements will determine the kinds of products banks will be able to distribute. It will have a huge impact in the Investment Banking business, which will suffer tough regulation and supervisory procedures. At the same time, credit risk models will be reviewed because they have failed to predict the crisis of 2008. The current financial and economic crisis doesn’t have any precedent in the past.

Recent studies have investigated the impact of the 2007-2009 financial crises on banks’ capital. Berger and Bouwman (2011) emphasised the importance of capital during financial crisis. Their empirical study concludes that banks with solid capital base have some benefits during the crisis than those that are poorly capitalised. Well capitalised banks are more able to withstand the shocks due to liquidity squeeze, and therefore had higher chances of surviving the crisis period. Other benefits accrued to well capitalised banks include increase in their market share and profitability, as customers withdrew their funds from less capitalised to a well-capitalised banks. This conclusion was also reinforced by a recent empirical study conducted Olivier de Bandt et al (2014) on a sample of large French banks over a period of 1993 – 2012. Similarly, Gambacorta and Marques-Ibanez (2011) demonstrate the existence of structural changes during the period of financial crisis. They conclude that banks with weaker core capital positions, greater dependence on market funding and on non-interest sources of income restricted the loan supply more strongly during the crisis period. Using a multi-country panel of banks, Demirgüç-Kunt, Detragiache and Merrouche (2010) find among others results, that during

In 1999 the United States Congress passed the Gramm-Leach-Bliley Financial Services Modernization Act which finished off the repealing process of the Glass-Steagall Act of 1933 (Moffett, Stonehill, & Eiteman, 2012, p. 114). The Glass-Steagall Act had imposed barriers within the United States financial sector, where commercial banking entities were separate from investment banks. This meant that commercial banks were able to operate in higher risk activities that were traditionally reserved for the investment institutes. Commercial banks were now able to directly offer their customers a wider array of loans, including creative mortgage arrangements.