The Financial Services Modernization Act of 1999

Executive Summary

• This banking act removed the Glass Steagall provisions.

Introduction

Under Bill Clinton, the Glass Steagall provisions were removed. These provisions had already been greatly diluted since being passed under FDR. This lead to both massive consolidation in banking, but also banks becoming riskier as the investment banking culture influenced the commercial banking side of these banks that no longer had a division between them. This was a monumental blunder and in part led to the 2008 mortgage backed security crisis. Elizabeth Warren has proposed bringing back the Glass Steagall restrictions as the following quote explains.

“The story of the 2008 crisis is that you had these firms outside of the public safety net and regulatory perimeter, but hooked into banks inside the safety net,” says Stanley of Americans for Financial Reform. “They all passed the hot potato of risk until nobody knew where it was.” The financial crisis showed, as Federal Reserve Governor Daniel Tarullo noted in a speech last month, that you cannot wall off shadow banking from traditional banking, and this allows unregulated firms like shadow banks to take greater risks, secure in the knowledge that they would get bailed out if they found themselves in trouble. One solution is to go back to the New Deal era, with traditional banking on one side and trading on the other, and a solid wall between them. Reinstating the Glass-Stegall Act, as senators like Elizabeth Warren have endorsed, would serve this purpose, providing clarity to regulators who would not need to understand multiple complex intricacies when monitoring a bank. “Banking should be boring,” Warren has said.” – PSMag

Source: PS Mag

https://psmag.com/economics/banks-dont-much-banking-anymore-thats-serious-problem-72654