A Better Way to Revive Glass-Steagall
8 Pages Posted: 24 May 2017
Date Written: May 22, 2017
The Glass-Steagall Act of 1933 effected a separation of commercial and investment banking in two ways. First, it prohibited the affiliation of the two types of banks. Second, it prohibited commercial banks from engaging in investment banking activities, and investment banks from receiving deposits. The anti-affiliation provisions of Glass-Steagall were repealed in 1999 by the Gramm-Leach-Bliley Act, but the prohibitions on the activities that commercial and investment banks themselves engage in remain in force. The prohibition on investment banks' receiving deposits, Section 21 of Glass-Steagall, has, however, been arbitraged into virtual meaninglessness in recent years, as investment banks comply with the letter of the prohibition while issuing oceans of short-term debt that function as the economic equivalent of deposits. Noting recent bipartisan calls for a revival of Glass-Steagall, this essay argues that bolstering Section 21 to address this arbitrage would be far more effective as an anti-bailout measure than reviving the anti-affiliation provisions of Glass-Steagall.
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