La Salle University : The Volcker Rule Case Study

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La Salle University

The Volcker Rule Case Study

Henri Popa and Christian Giambuzzi
FIN 306-01 Financial Services Industry
Dr. Elizabeth W. Cooper
February 20th 2015

The Glass-Steagall Act was a law enacted right after the stock market crash of 1929, whose intent was to split commercial and investment banking activities into two different entities. The main objective of the act was to prevent future crises and bank runs. The provision of the act disallowed commercial banks to deal with underwriting and/or dealing in securities, and to have a cap in place on the amount of debt securities being purchased by the bank, after it was approved by the regulatory agencies at the time. The act also stipulated that investment
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Regulators over time feared that this act would undermine the role and competiveness of the commercial banks in the financial system. Non-banks, such as General Motors and Sears began offering consumer credit through their finance companies, creating competition with commercial banks for consumer loans. With regulation Q in place, interest paid on savings and other deposit accounts where capped, and when the rate of inflation rose pass the maximum allowed yield on the accounts, consumers pulled their money out of the banks in favor of finance companies, government and AAA corporate bonds, that paid a higher yield and were also safe. This was the final straw that broke the camel’s back, the Glass-Steagall Act was repealed, and the Gramm, Leach, Bliley Act of 1999 was passed. The financial crisis of 2007-2009 can be attributed to many reasons: the Community Reinvestment Act, the creations and securitization of subprime mortgage loans, and the buying and selling of these securitized loans by banks. The Community Reinvestment Act was designed to “encourage” depository institutions of lending to all segments of individuals, predominantly those in low to moderate-income levels, preventing “redlining.” As a result of this act, subprime mortgages where created. The subprime mortgages were issued with variable interest rates, permitting borrowers to make payments only towards the interest and not their principal payment. As the rate of
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