Glass-Steagall: Repeal the repeal?

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Revived Glass-Steagall-type legislation might well benefit banks more than they like to believe.

The rallying cry for a return to Glass-Steagall is becoming deafening. Richard Fisher, president of the Federal Reserve Bank of Dallas, in an interview with Euromoney, says he is expecting discussions around "Glass-Steagall 2.0" to commence in earnest in October.

In an interview with the Financial Times in September, Citi’s former chief executive, John Reed, also backed a return to Glass-Steagall, arguing that the "culture clash" between trading and commercial banking leads to "behaviour that isn’t necessarily productive for the economy". He pointed out that in his experience the repeal of the legislation in 1999 resulted in no cost benefit to financial institutions.

Banks argue that such a move back to Glass-Steagall would be too complex, but the proposals for a "21st century Glass-Steagall Act", do little to support their rhetoric.

Financial institutions would not receive deposit insurance or access to the Fed discount window or a bailout for anything other than their commercial banking enterprises. Non-traditional banking and intermediation would be regarded as a separate business, but a "break-up" would not be obligatory.

Fisher says the only thing stopping a return to Glass-Steagall is the wall of money banks are prepared to throw at lawyers to block it. But for what? Are financial institutions going to make far less money if Glass-Steagall is reinstated? That is their concern. But that is tantamount to saying that the business of banking is unprofitable unless large amounts of risk are taken. That simply is not the case, and Reed’s experience underlines that the costs saved are not that great.

Here’s what the opponents of the re-repeal need to recognize: From Glass-Steagall’s introduction in 1933 up to its repeal in 1999 there were no big-bank failures and the US economy prospered even without the alleged extra banking profits that the Act was preventing being made. Plus, a new Glass-Steagall might even allow the banks to be more gung-ho with their investment banking and trading businesses if a clear separation between them and commercial banking were reinstated. Do we believe there will be no innovation on the part of financial institutions to seek profit from elsewhere?

A reincarnation of Glass-Steagall is gathering momentum and it’s about time. The banks would do well to tell their shareholders to support the move, because it might work in their favour both as taxpayers and investors.