The Separation of Commercial and Investment Banking The Glass-Steagall Act Revisited and Reconsidered

by Benston, George J.

• ISBN13: 9780195208306
• ISBN10: 0195208307
• Format: Hardcover
• Copyright: 1990-08-16
• Publisher: Oxford University Press

Summary

The 1933 passage of the Glass-Steagall Act by Congress has profoundly effected the way banking has been conducted in the United States. Designed to prevent the kinds of bank failures that resulted from the Crash of 1929 and the Great Depression that followed, the Act made it illegal for commercial banks to engage in investment banking, and for investment banks to engage in commercial banking. This study explores the reasons for the passage of the Act, offers new insights into the forces that shaped the final legislation, and examines the possible consequences of repealing the Act--arguing that repeal will not result in the resumption of the problems that created a need for protective legislation.

Table of Contents

List of Tables

Introduction

A Very Brief History of the Act

A Brief History and Overview of the Book

The Provisions of the Glass-Steagall Act

The Generally Accepted Rationale for the Separation of Commerical and Investment Banking

Summary of the Rationale for the Legislation and Outline of the Present Inquiry

Sources and Contents of Information: Pre-Glass-Steagall

Evidence on the Risk of Losses

Allegations of Risks Caused by Banks' Securities Operations

Speculations About Risks Listed in Part 7, Chapter IV of the Glass Subcommittee Hearings

Evidence on Risks Given in the Glass Subcommittee Hearings

The Failure of the Bank of United States

Failure of Banks that Conducted Securities Operations Compared with Other Banks

Securities Affiliates and the Securities Holdings and Consequent Failure of Allied or Other Banks

Conclusions

Conflicts of Interest and Abuses

Sources of Data

General and Often Incorrect and Misleading Allegations of Conflicts of Interest and Abuses

The Charges Against National City Bank and Mitchell

The Charges Against Chase National Bank and Wiggin

Unloading Excess or Bad Securities on Bank Trust Departments by Securities Affiliates

Conflicts of Interest and Abuse By and Through Commercial Bank-Sponsered Trusts and Investment Companies

Summary and Conclusions

Appendix - Allegations Not Relevant to Glass-Steagall

Securities Services: Improper Banking

Senator Bulkley's Conception of The Proper Role of Commercial Banking

The Performance of Securities Underwritten by Bank Affiliates

Securities Underwritten by the National City Company

The Performance of Commercial-Bank-Sponsored Investment Trusts, Companies, and Funds

Conclusions

Restraints on Competition and Political Necessity as Explanations

Commercial Banks' Federal 'Safety Net'

Federal Deposit Insurance

Federal Reserve Bank Discount Window Loans

Federal Reserve Intervention to Prevent a Banking System Crisis or Failure

Government Intervention to Prevent Disruptions Due to the Failure of Financial Service Firms Generally

The Additional Risk or Risk Reduction of Banks' Securities Activities

Evidence on the Risk of Combining Commerical and Investment Banking

Methods of Constraining Excessive Risk-Taking by Banks

Summary and Conclusions

Concern for Unfair Competition

Lower Cost of Funds (including Underpriced Deposit Insurance and the Protection of the Federal 'Safety Net')

Tax Deductibility of Carrying Costs

Captive Markets

Unequal Powers - Commercial

Investment Banking

Concentration of Power and Performance

Pre-Glass-Steagall Act

Current Concerns about Securities Underwriting

Current Concerns About Commercial Bank Trusts and Corporate Equities

Conclusions

Universal Banking

Imputed Advantages and Disadvantages of Universal Compared to Specialised Banking

Summary and Overall Conclusions

Other Reasons for Glass-Steagall

Senator Glass's Beliefs

The Failure of the Bank of United States

The 1930s Banking Crisis

Mis-statements by Senator Glass and Damaging Publicity from the Pecora Hearings

The Self-Interest of Many Commercial and Investment Bankers

Appendix: Securities Activitie

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