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

Year FDIC Coverage
1933 $2,500
1935 $5,000
1950 $10,000
1966 $15,000
1969 $20,000
1974 $40,000
1980 $100,000
2005 $250,000

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 It was later repealed in 1999 which gave banks more flexibility in the services they could offer.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?)

Related Articles
  1. Economics

    Understanding Cost of Revenue

    The cost of revenue is the total costs a business incurs to manufacture and deliver a product or service.
  2. Economics

    Explaining Carrying Cost of Inventory

    The carrying cost of inventory is the cost a business pays for holding goods in stock.
  3. Insurance

    Who is a Beneficiary?

    A beneficiary is a person or entity that receives funds, assets, property or other benefits from a trust, will, or life insurance policy.
  4. Fundamental Analysis

    Is India the Next Emerging Markets Superstar?

    With a shift towards manufacturing and services, India could be the next emerging market superstar. Here, we provide a detailed breakdown of its GDP.
  5. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  6. Investing

    How To Calculate Minority Interest

    Minority interest calculations require the use of minority shareholders’ percentage ownership of a subsidiary, after controlling interest is acquired.
  7. Retirement

    Strategies for a Worry-Free Retirement

    Worried about retirement? Here are several strategies to greatly reduce the chance your nest egg will end up depleted.
  8. Economics

    A Look at Greece’s Messy Fiscal Policy

    Investigate the muddy fiscal policy, tax problems, and inability to institute austerity that created the Greek crises in 2010 and 2015.
  9. Home & Auto

    4 Areas to Consider Roofing Material Types

    Roofing your home is very important, that’s why you should choose a roof specifically designed to handle your area’s climate.
  10. Markets

    The 5 Biggest Canadian Insurance Companies

    Learn more about the insurance industry as a whole, how it functions in Canada, and the five largest Canada-based insurance companies.
RELATED TERMS
  1. Principal-Agent Problem

    The principal-agent problem develops when a principal creates ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  3. Discount Bond

    A bond that is issued for less than its par (or face) value, ...
  4. Surplus

    The amount of an asset or resource that exceeds the portion that ...
  5. Cash Flow

    The net amount of cash and cash-equivalents moving into and out ...
  6. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors ...
RELATED FAQS
  1. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
  2. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>
  3. Why can additional paid in capital never have a negative balance?

    The additional paid-in capital figure on a company's balance sheet can never be negative because companies do not pay investors ... Read Full Answer >>
  4. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  5. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!