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The Structure of the Banking System

The End of Glass-Steagall

In 1933 President Roosevelt signed the groundbreaking Glass-Steagall act which legally separated the banking industry into commercial banking and investment banking. This law was passed in reaction the Great Depression and big wave of bank failures. Nearly 70 years later, legislation was passed doing away with most key clauses in the Glass-Steagall act.

Read the information in the background material, look for more information, and then write a 2 to 3 pages paper answering the following questions:

Does the repeal of Glass-Steagall have a positive or negative effect on the banking industry? In the course of preparing your paper, be sure to consider the benefits to banks as well as to bank customers in your analysis.

There has been a lot of criticism on the repeal of Glass-Steagall Act and people have started asking the U.S. government to bring back the Glass-Steagall Act. According to the FDIC (Federal Deposit Insurance Corporation), more than 120 banks have failed in the past two years (from 2007 to 2009), in large part due to the risky investments they have been making, such as mortgage backed securities.

Should the U.S. government bring back the Glass-Steagall Act? Please explain your reasoning in brief.

Solution Preview

The repeal of the Glass Seagall Act of 1993 had a negative impact on the banking industry in the United States of America. This is because it contributed to the collapse of the financial market in 2008-2009. The subsequent boom in the sub-prime market allowed many unqualified institutions invented to line their own pockets with no warning to prospective homeowners. The laws that previously guarded against such wanton practice had vanished. Many unscrupulous agents, brokers and lenders worked together to rake profits while unwitting would be homeowners thought they were getting a piece of the American Dream (The Repeal of the Glass, 2012). Another negative effect is that, conflicts of interests can characterize granting of credit and the use of credit by the same entity or bank which would in turn lead to abuses that were originally in the act. Another thing is that dealing with security activities becomes risky thus leading to huge losses. Such losses could in the long run threaten the integrity of the deposits. As a response to this, the government ensures that there is soundness and competition in the market for funds, whether it is loans or investments. Another thing is that depository is meant to manage or prevent risk. ...

Solution Summary

The solution the structure of the banking system.

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