- June 1, 2020
Position Paper – Reinstating the Glass-Steagall Act
POSITION PAPER – REINSTATING THE GLASS-STEAGALL ACT 12
PositionPaper – Reinstating the Glass-Steagall Act
PositionPaper – Reinstating the Glass-Steagall Act
The1933 Glass-SteagallAct, the brainchild of Henry Steagall and Senator Glass Carterremains one of the most debated and widely contested laws in thehistory of the American Financial and Banking industry. Investmentand commercial banks alike widely disputed the passage of this law.According to Branson (2014), proponents of this piece of thelegislation argued that it would aid prevent possible future fiscalcrises after the 1929 financial meltdown. Over time, politicians haveused the whole issue surrounding the enactment of the Glass-Steagalland its subsequent repeal in 1999 as the basis of their campaigns.Notably, this has become one of the foundations of political gimmicksin which presidential and gubernatorial aspirants tell the electoratethat they can reinstate the Act for the economic benefit of the U.S.monetary and financial system. However, politicians are not in thebest position to make major financial decisions (Neal & White,2012 Barth,Brumbaugh, Wilcox & United States, 2011).Formulating policies and decisions that are of strategic importanceto an economy should not remain in the hands of politicians who seekfame and power for their terms in office. Instead, the entire processof formulating policies and legislations that affect the financialand monetary system should encompass the stakeholders and experts.Thus, this paper presents Citi Bank’s opposition to the proposedreinstatement of the Glass-Steagall Act into the U.S. economy bygiving the reason why the law should not be restored.
In1933, the U.S. Congress passed the Banking Act. This law also calledGlass-Steagall Act, placed a boundary between investment andcommercial banking activities (Berghe & Verweire, 2013 Krantz &Johnson, 2014 Guillén& Suárez, 2015).Before its enactment, commercial and investment banks had a thin andinvisible line between them. This means that commercial banks freelyengaged in investment banking business. Also, prior to the enactmentof this legislation, the United States experienced one of its lowestmoments in history. In 1929, the Great Depression occurred (Russell,2014).This depression negatively impacted the U.S. economy. Notably, theU.S. economy almost collapsed. It was at this time that legislatorsbegan speculating on the reasons for the Great Depression. Thepolitical class came to a conclusion that the banking sector needed aform of regulation that would limit securities and affiliationsbetween investment and commercial banks. For this reason, VirginiaSenator, Glass Carter and House Banking Committee chairman, HenrySteagall sponsored a bill to Congress. This bill was later passed andbecame famously known as the Glass-Steagall Act. According to Neal& White(2012), this legislation also made it illegal for banks to payinterest on demand deposits. This provision was referred to asRegulation Q. Garten (2011) indicated that the aim of the law was notonly to cut the operational links that existed between commercial andinvestment banks but also to restore the confidence of the Americansin the country’s financial and banking system. Barth,Brumbaugh, Wilcox, and United States(2011) have discussed that the Glass-Steagall legislation also aimedat putting an end to the record run on the banking system.
However,due to the bottlenecks of the law, the United States Congresseventually repealed the Act in 1999, paving the way for commercialand investment banks to spread their wings in serving the Americans.Nealand White(2012) have argued that commercial banks played an instrumental rolein influencing the Congress to reconsider its 1933 decision. Almost adecade after the repeal of the Act, another financial crisis struck,this was the 2007-2009 global financial crisis (Frankel,2016).Although some people and members of the political class blamed thecrisis on the 1999 Glass-Steagall repeal, the retract of thisretrogressive Act had nothing to do with the financial meltdown thataffected many nations of the world. Reinstating the Glass-SteagallAct would hurt the American and the global economy in its entirety.
Justificationsfor Oppositionto the Reinstatement of Glass-Steagall Legislation
FutureFinancial Crises are Imminent
Reintroducingthe law would possibly put the world at the risk of another majorfinancial crisis. Russell(2014) argued that the Glass-Steagall Act could have instead,exacerbated the 2008 global financial crisis. Their argument is basedon their experiential knowledge after several years of research andpracticing in the financial and banking sectors. The global fiscalcrisis still lingers in the memory of some since it resulted in thecollapse of major investment banking powerhouses such as LehmanBrothers (Branson,2014).Furthermore, it also led to the sale of other investment bankinggiants such as Merrill Lynch. These events made legislators to raisequestions about the repeal of the Glass-Steagall law a decadeearlier. However, the 2008 financial crisis had nothing to do withthe repeal of the Banking Act in 1999.
Froma banker’s and an economist’s perspective, a re-establishment ofthe Glass-Steagall Act would possibly create another financial crisisaround the globe. The aftermath of this crisis would compel the U.S.government to bail out the nation`s banks to restore the system aswas the case in 2008 (Funk& Hirschman, 2014).Separating commercial banking activities from those of investmentdepositories would not in any way prevent a future financial crisis.Instead, it would result in another meltdown since the reinstatementof the law that erected a wall between commercial and investmentbanking in the past would limit the amount of money that circulatesbetween the two. Such an effect would also restrict the number ofinvestments that Americans have devoted to capital investments inthese banks. Activities that increased the gravity of the fiscalcrisis had little if any to do with the Banking Act. Russell(2014) argued that other financial institutions that were tradingderivatives at the time further deepened the global financial crisis.Therefore, a restoration of the Glass-Steagall Act would not absorbthe unexpected shocks that would come in the future. Instead, thislegislation would have a damaging impact on the security of thefinancial future of the U.S.
BanksKnow How to Regulate Themselves
Notall proponents of re-establishment of the Glass-Steagall legislationare agents of a positive change in the financial system. Theassumption that investment banks will engage in unethical dealingswith the aim of obtaining supernormal returns is unfounded. A fieldstudy by Berghe and Verweire (2013) showed that some people had helda notion that before the repeal of the Glass-Steagall Act, investmentbanks had a limited chance of interfering with consumer balancesheets. Thus, reviving the law would have positive outcomes onconsumer bank balance sheets. From a professional and ethicalperspective, banks are essentially managed by experts who uphold highlevels of integrity. According to Russell(2014), this integrity is the reason that people have trusted bankswith their money since the advent of banking. While it is evidentthat the legislative arm of government has a constitutional mandateto regulate various sectors of an economy, the same form ofregulation that is applicable in other industries would not berelevant in the commercial and investment banking industry.Therefore, reinstating the Glass-Steagall Act would mean thatlegislators do not believe in the integrity and professionalism ofthe institutions they entrust with their money.
Asa fact, banks have complex business and legal structures that ensureall their activities are within the confines of the law. Inparticular, investment banks have their unique legal frameworks thatare tasked with ascertaining that institutions that offer investmentbanking services are under the regulation of the United StatesFederal Financial Industry Regulation Authority (FINRA) (Funk& Hirschman, 2014Branson,2014).Such legal frameworks are crucial in facilitating regulatoryoversight. In turn, this oversight enables stakeholders in the systemto find proper ways of resolving issues that arise in investmentbanking on a routine basis. This is a factor that has motivated CitiBank to oppose the idea of restoring the 1933 Glass-Steagall Actactively. In essence, there are several legislations and legalframeworks that are currently in place for ensuring the investmentand commercial banking systems of the United States operate withinthe confines of the United States Federal Constitution for servingthe interests of all Americans at all times.
Interconnectivityof Financial Markets
Reinstatingthe Glass-Steagall Act would mean that the progress made in moderntimes in the banking industry would have little meaning. It is a badidea if the financial and banking sector would go back to the 1930s.Today, the financial markets are interconnected. Any effort ofbringing back the Banking Act would jeopardize thisinterconnectivity. Berghe & Verweire (2013) articulated thatinterconnectivity is inevitable in today’s financial and bankingsystem. This is attributable to the increased number of clients thatcommercial and investment banks attend to on a daily basis. For thisreason, any form of law that could interfere with this process isunacceptable. The limitations of such a law surpass the anticipatedbenefits. According to Guillénand Suárez(2015), interconnectivity between the investment and commercialbanking systems is beneficial to the American economy from variouspoints of view. These advantages not only benefit the citizens andthe private sector but also the government. The financial servicesthat commercial and investment banks provide are crucial in economicdevelopment (Krantz & Johnson, 2014 Funk& Hirschman, 2014).Therefore, this contravenes the assumption that investment andcommercial banks are the only beneficiaries of the services theyprovide. For instance, raising of financial capital, provision ofequity securities, as well as the market making services have playeda vital role in improving the living standards of many Americans.Therefore, this means that a return of the Glass-Steagall Act wouldinterfere with the progress that the United States has experienced sofar in its financial system. The interference would come as a resultof challenges that would emanate from a disconnected financialmarket.
Interconnectivityof financial markets is also attributable to the risky nature of thebanking business. Barth,Brumbaugh, Wilcox, and United States(2011) articulated that the banking sector is a risky business due toseveral reasons. One of these reasons is the substantial investmentsneeded in the industry. The capital investments would be tough torecover in the event of losses that result from legislations that areenacted without consulting stakeholders in the banking sector andfinancial experts who could offer vital sentiments. Managing thisform of risk requires more than just a mere re-establishment of theGlass-Steagall 1933 Act. Guillénand Suárez(2015) proposed other mechanisms of managing the risks that exist inthe banking sector. These mechanisms include advanced capital andliquidity requirements. By using these mechanisms, banks can elevatetheir internal controls for the liquidation of clients` assets (Funk& Hirschman, 2014).
Integrityin the Banking Business
Inthe recent past, presidential aspirants across the political divideshave argued that the banking industry is increasingly becomingcorrupt. Krantz and Johnson (2014) described this by indicating thatthe political class has used the analogy of insurance companies onmany occasions to describe how banks are developing a culture ofcorruption. According to politicians, American investment banks haveswindled Americans millions of dollars since the Congress’ repealof the Glass-Steagall law in 1999. There have also been claims offraud at Wall Street as a result of dubious investments. In a bid tocounter these allegations genuinely, Citi Bank categorically statesthat these assumptions are nothing more than opinionated gimmicks forelection and re-election of the political class. Banks have elaborateways of conducting background checks on staff to ensure those whohave a culture of corruption are not entrusted with people’s money.As a fact, the banking industry has integrated information technologyinto all their operations. Consequently, there is an increase in thelevel of transparency in the commercial and investment bankingsystems that allows customers to see most of the transactions thatinitially happened in the background. Therefore, restoration of theGlass-Steagall Act would not improve integrity in the bankingbusiness.
DownwardTrend on Employment
Affiliationsbetween investment and commercial banking institutions have apositive effect on employment. Banks value the role they have in theeconomic development of any nation. Therefore, this is the primaryreason multinational commercial banks that have other branchesoutside the United States do their best to participate in corporatesocial responsibility (CSR) on a regular basis. As part of CSR, thebanking industry ensures that it employs as many people as possibleto help them meet their organizational targets. Accordingly, sincethe re-imposition of the Glass-Steagall legislation would limit howcommercial and investment banks interact, it would have anundesirable impact on employment (Garten, 2011). When commercialbanks extend their wings to participate in the investment sector,they employ several professionals who are instrumental in executingthe operations of these institutions. These experts include financialanalysts, fiscal advisors, accountants, and internal auditors.Therefore, this means that these people would lose their jobs ifinvestment banking would remain separate and distinct from thecommercial wing. The loss of jobs would result due to the incapacityof the remaining investment banks to retain additional workers. Inessence, this means that regulatory attempts through theGlass-Steagall Act would have adverse effects that might not beobvious at the moment. Therefore, Citi Bank opposes a possiblerevival of the 1933 Banking Act with the interest of the Americans atheart.
Competitionin the Investment Banking Business
Competitionin the investment banking sector is as healthy as it is in any otherindustries. A re-imposition of the Glass-Steagall legislation wouldinjure this contest. Citi Bank recognizes the importance of a healthycompetition in investment banking. This form of competition bringsthe possibility of expanding the investment banking business togreater heights. Besides, competition among players in the investmentbanking sector facilitates the process of providing quality productsto the American citizens. According to Frankel(2016), the Financial Services Modernization Act that repealed theGlass-Steagall Act placed the industry in a good position to providebetter services to its clientele. Thus, this implies that a possiblereestablishment of the law would be a retrogressive step. Evidently,this would mean that the investment banking business would stay atthe dominance of leading investment banking powerhouse such as J.PMorgan and Goldman Sachs. Also, globalization of the internationalfinancial markets has driven creativity and innovation as evident inthe products that investment banks offer to their clients (Guillén& Suárez, 2015).Therefore, this clearly implies that it would be unwise forlegislators to enact laws that prohibit commercial banks in theUnited States from participating in underwriting securities thatother firms in foreign countries are free to participate.Furthermore, contrary to the 1930s when the Congress enacted theGlass-Steagall Act, today’s commercial and investment banks in theU.S. are looking forward to opening foreign branches this was notthe case in the earlier years. Therefore, a reinstatement of the lawin the U.S. would affect the foreign offices that banks may have.Thus, this shows that the 1933 Banking Act is impractical in moderntimes.
Insummation, the 1933 Glass-Steagall Act was a retrogressive law. Itsenactment under the leadership of HenrySteagall and Senator Glass Carter was of little benefit if any to theUnited States’ economy and the globe at large. This piece oflegislation has remained among the most controversial laws thatpoliticians enacted to regulate investment and commercial banks. Atthe time of its enactment in 1933, most people thought it would playan instrumental role in preventing severe financial crises. However,Barth,Brumbaugh, Wilcox and United States,(2011) and Guillén and Suárez (2015) have indicated that the 1929and 2007-2009 global economic crises were not as a result of anunregulated banking industry. The argument that the Glass-SteagallAct could have played an instrumental role in preventing the 2008financial crisis is baseless and unfounded. As a fact, if the Act hadexisted at the time, it could have worsened the financial crisis. Inthis case, the whole impression of bringing back the controversiallegislation is misguided. The repeal of the Glass-SteagallAct has had notable benefits. One of the advantages of the retractof this Act is the expansion of the banking sector and an increase inemployment (Funk& Hirschman, 2014Krantz & Johnson, 2014). In essence, this means that reviving thelegislation would impede the progress that has been made in thefinancial sector. Therefore, Citi Bank strongly opposes any effort toreinstate the Glass-Steagall Act. Even though Citi Bank respects thefreedom of all presidential aspirants across the political divides,this institution categorically condemns any efforts by thesecandidates to politicize critical and emotive issues. Thus, for thebenefit of the American citizens, the Glass-Steagall Act should notin any way be reinstated.
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