FOR IMMEDIATE RELEASE
July 11, 2013
Contact: Jim Lardner, 202-466-1854
AFR STATEMENT ON WARREN/McCAIN/CANTWELL/KING ‘21st CENTURY GLASS STEAGALL ACT’
For some sixty years the U.S. financial system grew and prospered under a clear division between commercial banking and the casino world of trading and speculating. The bipartisan legislation introduced today by Senators Warren, McCain, Cantwell, and King restores this traditional principle, commonly known as Glass-Steagall (after the landmark 1930s law that spelled it out), while adding new protections to update it for 21st century financial markets. Americans for Financial Reform supports this legislation, which would make our financial system safer and focus banks on making sustainable loans to homeowners and businesses.
The Glass-Steagall firewall helped prevent the spread of financial instability from the trading markets to the rest of the economy. The demolition of that barrier not only contributed to the financial meltdown, but also facilitated the current dominance of a small number of global mega-banks. Under Glass-Steagall, major investment banks such as Drexel Burnham and Salomon Brothers failed without creating serious contagion in the broader economy. But in the post-Glass Steagall world of the 2008 crisis, the failure of investment banks like Bear Stearns and Lehman threatened the entire economy.
This legislation restores the division between commercial banking and financial market activities – a change that will make our financial system more secure and better able to support the real economy. It also updates this division in necessary ways. Even before the Gramm-Leach-Bliley Act, which formally repealed Glass-Steagall, administrative decisions by regulators such as the Federal Reserve and the OCC had seriously eroded the division between commercial and investment banking. That erosion was made possible by loopholes in the original Glass-Steagall statute. This new legislation strengthens the original Glass-Steagall language by adding clear prohibitions on commercial bank involvement in a range of dealer, trading, and derivatives market activities, while still preserving the ability to engage in traditional trust and fiduciary roles.