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July 29, 2013

New Glass-Steagall would help to keep lenders in line

Two weeks ago, this column argued that Glass-Steagall, the Depression-era legislation that barred US commercial banks from investment banking and insurance, should not have been repealed, and that something like it should be reinstated. There was copious feedback, so let us return to the issue.

Rather than look at the 1999 repeal’s obvious failure to have the hoped-for positive consequences, let us to ask what Glass-Steagall was meant to achieve, and what the reimposition of Glass-Steagall, or something like it, could achieve now.

At the time, one aim dominated all others. Depositors’ money was to be sacrosanct. The US had suffered too many bank runs, when loss of confidence by depositors brought down otherwise healthy institutions. Glass-Steagall, by making it harder for banks to take risks with depositors’ funds, was an integral part of the measures to thwart bank runs.

There were other elements. Deposit insurance, backed by an aggressive regulator which ensured that banks behaved themselves, was critical. So were rules – which grew inconvenient as clients grew more mobile – to stop banks offering services in more than one state. This made them smaller and easier to police.”


Read full Financial Times article here

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