Banking Regulation- Glass-Steagall versus Gramm-Leach-Bliley

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INTRODUCTION
The Glass-Steagall Act-or more formally, the Bank Act of 1933-seperated commercial and investment banking into separate and distinct industries. The Gramm-Leach-Bliley Act-or more commonly, Financial Services Modernization Act- repealed large sections of Glass-Steagall, again allowing banks to offer both investment and commercial banking services simultaneously. While many blame Gramm-Leach-Bliley for the financial crisis of 2008-2009, it was not the cause of the crisis. The vertical consolidation in the financial services industry it allowed, however, magnified the industry specific trigger among sub-prime debt based securities into an economy-wide meltdown. The reinstitution of Glass-Steagall in the form of the Dodd-Frank Act (also known as the Wall Street Reform and Consumer Protection Act) now seeks to find a middle-ground- avoiding over-regulation while avoiding the excesses of an overly consolidated financial services industry.

THE ORIGINAL: GLASS-STEAGALL
Passed on the tide of massive bank failures as well as the Great Depression, Glass-Steagall sought to shore up the nation's banking industry-thereby smoothing the road for economic recovery. Cftech.com summarizes the primary provisions of Glass-Steagall into three main parts:
(1) Banks were investing their own assets in securities with consequent risk to commercial and savings deposits.
(2) Unsound loans were made in order to shore up the price of securities or the financial position of companies in which a bank had invested its own assets.
(3) A commercial bank's financial interest in the ownership, price, or distribution of securities inevitably tempted bank officials to press their banking customers into investing in securities which the bank itself was under pressure to sell because of its own pecuniary stake in the transaction. (Cftech.com, n.d.).
So much like the separation between church and state, Glass-Steagall sought to separate investment and commercial banking into distinct industries. Commercial banks would no longer be allowed to parley deposits into security investments, thereby shielding depositors from risk they had not consciously accepted. With the temptation of aiding companies their invested in through even riskier loans removed, banks would profit merely through the turnover of ...