Glass-Steagall Act

AAA

DEFINITION of 'Glass-Steagall Act'

An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment banking business. The Glass-Steagall Act was sponsored by Senator Carter Glass, a former Treasury secretary, and Senator Henry Steagall, a member of the House of Representatives and chairman of the House Banking and Currency Committee. The Act was passed as an emergency measure to counter the failure of almost 5,000 banks during the Great Depression. The Glass-Steagall lost its potency in subsequent decades and was finally repealed in 1999.
 

INVESTOPEDIA EXPLAINS 'Glass-Steagall Act'

 
Apart from separating commercial and investment banking, the Glass-Steagall Act also created the Federal Deposit Insurance Corporation, which guaranteed bank deposits up to a specified limit. The Act also created the Federal Open Market Committee and introduced Regulation Q, which prohibited banks from paying interest on demand deposits and capped interest rates on other deposit products (it was repealed in July 2011).
 
The Glass-Steagall Act's primary objectives were twofold – to stop the unprecedented run on banks and restore public confidence in the U.S. banking system; and to sever the linkages between commercial and investment banking that were believed to have been responsible for the 1929 market crash. The rationale for seeking the separation was the conflict of interest that arose when banks were engaged in both commercial and investment banking, and the tendency of such banks to engage in excessively speculative activity.
 
The Glass-Steagall Act's repeal in 1999 is believed in some circles to have contributed to the 2008 global credit crisis. Commercial banks, around the world, were saddled with billions of dollars in losses due to the excessive exposure of their investment banking arms to derivatives and securities that were tied to U.S. home prices. The severity of the crisis forced Goldman Sachs and Morgan Stanley, the last of the top-tier independent investment banks, to convert to bank holding companies. Coupled with the acquisition of other prominent investment banks Bear Stearns and Merrill Lynch by commercial banking giants JP Morgan and Bank of America, respectively, the 2008 developments ironically signaled the final demise of the Glass-Steagall Act.
 

RELATED TERMS
  1. Investment Bank - IB

    A financial intermediary that performs a variety of services. ...
  2. Crisis Management

    The identification of threats to an organization and its stakeholders, ...
  3. McFadden Act

    Federal legislation that gave individual states the authority ...
  4. International Banking Act of 1978

    Federal banking legislation that put all domestic bank branches ...
  5. Depression

    A severe and prolonged downturn in economic activity. In economics, ...
  6. Credit Crisis

    A crisis that occurs when several financial institutions issue ...
Related Articles
  1. The Rise Of The Modern Investment Bank ...
    Insurance

    The Rise Of The Modern Investment Bank ...

  2. The Role of Commercial Banks in the ...
    Investing Basics

    The Role of Commercial Banks in the ...

  3. 5 Signs Of A Credit Crisis
    Bonds & Fixed Income

    5 Signs Of A Credit Crisis

  4. The SEC: A Brief History Of Regulation
    Economics

    The SEC: A Brief History Of Regulation

Hot Definitions
  1. Halloween Strategy

    An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market ...
  2. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  3. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  4. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  5. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  6. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
Trading Center