TOO BIG TO FAIL The Glass-Steagall Act.
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NAFCU’s whitepaper outlines how a modern Glass-Steagall Act would protect American consumers from the exploitive behavior of “too big to fail” institutions. It also discusses how the act could help limit the economic impact of these institutions in the event of an economic downturn.
Specifically, the Act could:
protect consumers against future financial crises;
ensure traditional depositories can continue to thrive in a stable financial marketplace;
reduce the competitive inequalities and moral hazard that arises when large banks take risks on consumer deposits to generate profits;
improve overall financial stability in times of stress by separating commercial and investment banking.
To learn more about this analysis, please download NAFCU’s whitepaper below.
The Glass-Steagall Act (GSA) is the modern name given to the Banking Act of 1933, which was established in response to the stock market collapse and depression in the late 1920s. The legislation established many safeguards to protect private citizens in the future, but most notably it created the Federal Deposit Insurance Corporation (FDIC), which insures private bank funds for consumers.
However, in 1999, the Gramm-Leach-Bliley Act (GLBA) effectively repealed several key sections of the GSA, resulting in an under-regulated environment that benefited large institutions by incentivizing megamergers. This resulted in the creation of institutions that are able to engage in virtually unlimited activities, oftentimes outside the reach of federal and state regulators.
Eventually, this unregulated environment resulted in the consolidation of commercial and investment banks into large financial conglomerates and gave rise to the current ensemble of “too big to fail” institutions, whose losses during the financial crisis accounted for three-fifths of worldwide losses recorded from mid-2007 to the spring of 2010.
In recent years, several bipartisan efforts have voiced support for the reinstatement of the GSA, raising concerns of “too big to fail” institutions.