The Glass-Steagall Act is a 1933 law that plays an important role in separating investment banking from retail banking. The initial sale of stocks is called the initial public offering that has been organized by the investment banks. It helps in facilitating mergers and acquisitions. About this, there are several investment banks that operate their own hedge funds. That retail bank loans, manage the checking accounts, and also took the deposits into consideration.
Best operating banking from retail banking, the retail banks get prohibited from using the depositors’ funds to take any decision regarding the risky investments. According to the statistics available, only 10% of the income of the retail banks can be availed from selling the securities.
Glass Steagall Act 1933
The Glass Steagall Act that created the federal deposit insurance corporation is also important to the depositors. This amazing law has proved to be beneficial for the Federal Reserve so that the retail banks can be regulated. Yes, through this, the federal open market committee gets created and it also allowed the Federal Reserve to implement the monetary policy in a better way.
This amazing law also played an important role in prohibiting the investment banks so that they cannot control the interest in the retail banks. Apart from this, they need to find other sources of funds that can separate from the depositors’ accounts. It also helped in prohibiting the banks from taking excessive borrowings or loans from other banking institutions.
When the law passed?
The House of Representatives passed the Glass-Steagall Act on 1933, May 25. President Roosevelt signed into the law by 16 June 1933 as part of the new deal. And then in 1945, it became a permanent measure. After getting passed, the banks almost took one year in deciding that it would be for the investment banks are the commercial banks.
What is the major purpose?
The major motive of launching this role is to permanently and the bank runs and the dangerous bank practices that have created them. Congress passed this law for performing a system that allows the failure of 4000 banks during the depression period. It actually helps in redirecting the banking funds from fuelling the stocks for building up the industrial capacity.
In 1920, the Federal Reserve banks were running low on the gold deposits as the stock market goes up. In such a situation, it becomes quite crucial to state the law. It allowed the bank to reopen and then them no longer able to exchange the dollars for gold. The currency was based on the bank’s paper assets.
Effect
The Glass-Steagall Act law has been restored confidence in the banking system of the United States. It increased the trust by allowing the banks to use depositors’ funds in the saving investments. During the administration, the banking industry complaint the act restricted them too much. The banking authorities said that they could not compete with the foreign financial firms that offer higher returns. Only in the low-risk securities, the banks were able to invest.
Repeal
On 12th November 1999, President Clinton passed the financial service modernization act. The repeal of this act gets consolidated investment and the retail banks also went through the financial holding companies. For this reason, there are few banks that took advantage of his repeal.
The Volcker Rule
After the financial crisis, some people wanted to reinstate this act. Thus, the key players in the industry argued that the return of this act will make them too small for competing with foreign industries.
Rather than reinstating the Steagall act. Dodd-Frank Act in 2010 was passed to reinstate the efforts and sections of the Steagall Act through the Volcker Rule.
The Volcker Rule primary focus to address the ills that were previously covered under the Steagall Act, without disrespecting or disorganizing the banking industry.
Should Glass-Steagall Be Reinstated?
Let me cover this section in detail. Reinstating the Steagall Act will better protect the depositors, but in the meantime, it will disrupt the structures of popular banks. Banks will no longer be big, and their growth rate will get slow down.
The congressional efforts to reinstate this act were unsuccessful. Thus, in 2011 the act was introduced to repeal the Glass-Steagal Act. However, if the efforts were successful then it would result in a massive reorganization in the banking industry.
The largest banks include Citi Bank, Commercial Banks, and Investment banks argued that if the act is reinstated then it would make them too small to compete in a global market.
Thus, rather than reinstating the Steagall act. Dodd-Frank Act in 2010 was passed to reinstate the efforts and sections of the Steagall Act through the Volcker Rule. (As mentioned in the above section)
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Frequently Asked Questions
Some questions have been frequently asked to us. Thus, we have decided to answer them over here. Let’s have a look.
What was the purpose of the Glass Steagall Act?
The primary purpose of the Glass-Steagall Act was to separate the investment banking sector from the commercial banking sector. This act was established in the wake of stock market cash in 1929.
Why was the Glass Steagall Act repealed?
This act was repealed in 1999 amid the limitations imposed on the banking sector. The limitations were too unhealthy for the banking sector. This allows banks to diversify without actually taking the risk.
Is the Glass Steagall Act still in effect?
No, it was repealed in 1999. This act is not in the effect in this era.
Conclusion
The Glass-Steagall Act was introduced to separate the investment banking sector from the commercial banking sector. The initial sales of stock were called the public offerings that were often held by the investment banks. This act is no longer in the effect after 1999 because of arguments of the largest banks and players in the industry.
This act will benefit the depositors but low-down the efficiency of the banks. Meanwhile, the largest banks will become too small to compete globally. However, this article is all about Glass Steagall Act. We have added every bit of information that one needs to know about his act. We hope it does help. If there is anything that is not understandable? You can ask us in the comments section.
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