Sen. Elizabeth Warren this week introduced an aggressive piece of legislation that intends to take the financial industry back to an era when there was a strict divide between traditional banking and speculative activities.
The bill, also sponsored by Sen. John McCain, R-Ariz., and two other senators, is named the 21st Century Glass-Steagall Act. Its intention is to create a modern version of the seminal Glass-Steagall legislation from the 1930s, which placed firm limits on what regulated banks could do. It was fully repealed in 1999, laying the groundwork for the mergers that created some of the biggest banks of today. If passed, it could force many of those banks to let go of their trading operations.
Warren’s bill is one of several that have aimed to add far more bite to the overhauls that have been put in place since the financial crisis.
“Over the past five years, we’ve made real progress,” said Warren, D-Mass. But, she added, “The biggest banks continue to engage in dangerous, high-risk practices that could once again put our economy at risk.”
Similarly stringent banking bills introduced in the past few years have struggled to gain sufficient votes in Congress, and this one may be no different. In addition, a move as radical as splitting up large banks is highly unlikely to gain the support of top regulators like the Federal Reserve or the Treasury Department.
“It seems mainly symbolic,” Phillip L. Swagel, a professor at the University of Maryland School of Public Policy, said. “This is a handle that people can grab to move the debate toward more regulation.”
Warren seemed to acknowledge the battle ahead, but she said that having McCain as an ally was an advantage. “He’s a fighter, and it’s going to take a fighter to get this Glass-Steagall bill through,” she said.
Nostalgia for the original Glass-Steagall Act might help the new bill gain interest. Its supporters say the former law had several straightforward benefits, in contrast to the complex regulations that have been put in place since the crisis, like the Dodd-Frank Act of 2010. Glass-Steagall, which had 37 pages, was simple and thus easy to put into practice, they say.
The act also kept banks that use federal deposit insurance out of potentially volatile Wall Street activities, like trading. As a result, problems at investment banks were less likely to infect regulated banks. Losses at the Wall Street operations of Citigroup and Bank of America weighed heavily on those banks during the 2008 crisis.
“For about 70 years, Glass-Steagall managed to keep the riskier, more damaging part of Wall Street away from what should be the boring, straightforward side of finance,” Barry L. Ritholtz, chief executive of FusionIQ, an asset management and research firm, said. “It was the height of stupidity repealing Glass-Steagall.”
During the era of Glass-Steagall, there were no systemic banking crises like the one that occurred in 2008. The restrictions the bill put on the financial sector did not seem to do much wider harm. According to analysis of government gross domestic product statistics, the U.S. economy grew an average of 4 percent a year from 1933 until 1999, when Glass-Steagall was in effect. Even some who championed repealing the act, like former Citigroup Chairman Sanford I. Weill, have since called for the breakup of the bank behemoths.