A bipartisan group of senators introduced on Thursday a modern version of the controversial 1933 Glass-Steagall Act designed to reduce the risk of future financial crises and risk to the American taxpayer.
The measure—the 21st Century Glass-Steagall Act, which was introduced by Sens. Elizabeth Warren (D-Mass.), John McCain (R-Ariz.), Maria Cantwell (D-Wash.) and Angus King (I-Maine)—would separate traditional banks with savings and checking accounts insured by the FDIC from riskier financial institutions that offer services like hedge funds, investment services, insurance and swaps dealing.
“Despite the progress we’ve made since 2008, the biggest banks continue to threaten the economy,” Warren said. “The four biggest banks are now 30 percent larger than they were just five years ago, and they have continued to engage in dangerous, high-risk practices that could once again put our economy at risk.”
Additionally, the legislation clarifies regulatory interpretations of banking provisions that undermined the original Glass-Steagall Act.
“Since core provisions of the Glass-Steagall Act were repealed in 1999, shattering the wall dividing commercial banks and investment banks, a culture of dangerous greed and excessive risk-taking has taken root in the banking world,” McCain said. “Big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured deposits. If enacted, the 21st Century Glass-Steagall Act would not end Too-Big-to-Fail. But, it would rebuild the wall between commercial and investment banking that was in place for over 60 years, restore confidence in the system, and reduce risk for the American taxpayer.”
The original Glass-Steagall Act was introduced following the financial crash of 1929 and subsequent Great Depression. The goal was divide the risky activities of investment banks from core depository institutions consumer rely upon.
Beginning in the 1980s, regulators reinterpreted regulatory definitions and legal terms that gradually broke down the separation of activities between institutions. After 12 attempts at repeal, Congress passed the Gramm-Leach-Bliley Act in 1999 to repeal Glass-Steagall’s core provisions.