Recent Banking Industry Crisis and Glass-Steagall Act
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Given the recent banking industry crisis, was repealing the Glass-Steagall act a mistake?
Be sure to consider effects on banks as well as on bank customers, and the market reaction to the repeal in your analysis.
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The recent banking industry crisis and Glass-Steagal Act is examined.
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The Glass-Steagall Act is also known as the Banking Act. This law was enforced in the year 1933 by Federal Deposit Insurance Corporation (FDIC) in order to introduced banking reforms. The main objective of this act was to control the speculation in the financial industry. The people were losing their assets and capital due to stock market crash. There were some provisions in the act, which allowed the Federal Reserve to regulate interest rates were replaced by the Monetary Control Act 1980. The Glass-Steagall act encouraged the people to start saving by building confidence in the American Banking System. This act also banned the connection between investment banking and the commercial banks in order to prevent market speculations and eliminate the possibility of future banking failures (Bitar, 2009).
The current banking industry crisis was due to decline in the home prices. The decline in the home prices caused an increase in the defaulters of the mortgage loan payment. The decline in the value caused a decrease in the value of borrowers and for this they stopped paying on their home loans. It caused a decrease in the banking liquidity due to increase in the number of defaults. Some banks suffered a large amount of loss due riskier mortgage loans or the loans in the area, which faced the largest decline in the house prices.
The change in the fundamental banking industry also caused the increase in financial crisis in the banking industry. The banks in the industry were diversifying their business activities in the different areas in order to become more competitive, which was posing more risk for the banks. The competition is also causing an increase in the acquisition of the smaller banks and other companies, which are providing financial services, by the larger and stronger banks in the banking industry (Banking, 2009). The financial crisis also caused an increase in the share of commercial banks in the investment banking, which were prevented by the Glass-Steagall act. It is because larger banks were ...
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