On June 16, 1933 the second Glass-Steagall Act (GSA) passed, which attempted to clarify and separated banks according to their major functions. The GSA, also known as the Banking Act of 1933, would differentiate the functions of commercial banks from investment banks. The desired result was a better understanding of the risks associated with all financial institutions.
The act is named after Senator Carter Glass and Congressman Henry B. Steagall. Before this, commercial banks were seen as taking on too much risk by investing depositors' funds into the stock market. After the act, commercial banks could only earn 10% on their income from investing activities. Also in the act was the Federal Deposit Insurance, which came into effect on January 1, 1934, and protected deposits up to $2,500. This was to stop future bank runs. As of 2005 the level was increased from $100,000 to $250,000 for certain retirement accounts.
Deposit Insurance Over The Years
After the largest financial crisis the United States had ever seen (the great depression), it was not surprising that an act which would identify and reduce risks for investors was passed. It was later repealed in 1999 which gave banks more flexibility in the services they could offer. Even now, with the current crisis, lawmakers need to be careful not to overreact when implementing regulations on financial institutions. This week, President Obama is scheduled to reveal information regarding regulation to financial instruments such as derivatives and capital requirements.
On one side, some feel it will reduce risks to have more funds set aside. On the other hand, there is an outcry that this will reduce the funds available to be lent out. More funds available for lending will reduce rates and could stimulate the economy. (For the complete history and effects of this act, check out What Was The Glass-Steagall Act?)