Business, Legal & Accounting Glossary
The Glass-Steagall Act is a landmark bill in Federal banking and securities law. Passed in 1933, in the middle of the Great Depression, the Glass-Steagall Act was aimed at restoring confidence in the banking system. Notably, the Glass-Steagall Act established the Federal Deposit Insurance Corporation, which insures customer deposits. But the Glass-Steagall Act is probably better known for prohibiting banks from participating in both commercial banking and investment-banking activities. Specifically, under the Glass-Steagall Act, banks could not both accept deposits and underwrite securities. Moreover, the Glass-Steagall Act provided that commercial banks could receive no more than 10% of their income from securities markets. Under the Glass-Steagall Act, financial institutions were given one year to decide if they would become commercial or investment banks. Whether these provisions of the Glass-Steagall Act made good economic sense or were an overreaction to the Crash of 1929 remain topics of debate. In 1999, the provisions of the Glass-Steagall Act that segregated commercial and investment banking were effectively repealed with the passage of the Gramm-Leach-Bliley Act.
The Glass-Steagall Act established the Federal Deposit Insurance Corporation (FDIC) and included banking reforms, some of which were designed to control speculation. Some provisions such as Regulation Q that allowed the Federal Reserve to regulate interest rates in savings accounts were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Other provisions which prohibit a bank holding company from owning other financial companies were repealed in 1999 by the Gramm-Leach-Bliley Act.
Two separate United States laws are known as the Glass-Steagall Act. The Acts (Glass & Steagall) were both reactions of the U.S. government to cope with the economic problems which followed the Stock Market Crash of 1929.
Both bills were sponsored by Democratic Senator Carter Glass of Lynchburg, Virginia, a former Secretary of the Treasury, and Democratic Congressman Henry B. Steagall of Alabama, Chairman of the House Committee on Banking and Currency.
The first Glass-Steagall Act allowed the government obligations as well as commercial paper to be used as reserve in banks
The second Glass-Steagall Act, passed on 16 June 1933, and officially named the Banking Act of 1933, introduced the separation of bank types according to their business (commercial and investment banking), and it founded the Federal Deposit Insurance Company for insuring bank deposits.
Literature in economics usually refers to this simply as the Glass-Steagall Act, since it had a stronger impact on US banking regulation.
The Glass-Steagall Act has had influence on the financial systems of other areas such as the mainland China which maintains a separation between commercial banking and the securities industries.
On November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933. One of the effects of the repeal is it allowed commercial & investment banks to consolidate. Economist Robert Kuttner has criticized the repeal of the Glass-Steagall Act as contributing to the 2007 subprime mortgage financial crisis .
The Emergency Banking Act of 1933 is often confused with the Glass-Steagall Acts, however, it was a separate and independent bill.
Signed into law by President Franklin D. Roosevelt on March 9, 1933, the Act’s primary function was to prohibit the hoarding of gold coins, and did so by authorizing the United States Treasury to request all people and companies of the U.S. to send in their gold reserves.
In addition, it ordered that all banks stop doing business until the Comptroller of the Currency had examined the soundness of such banks and had approved reopening.
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This glossary post was last updated: 23rd April, 2020 | 0 Views.