The objectives of the Glass-Steagall Act were “to provide for the safer and more effective use of the assets of banks, to regulate interbank control and to prevent the undue diversion of funds into speculative operations.” The federal legislation mandated a division between commercial banking and investment banking and prohibited federally chartered banks from trading in securities. It also established the Federal Deposit Insurance Corporation (FDIC), which guaranteed deposits up to a designated amount. (Originally $2,500, that amount is $250,000 as of 2017.) Additional provisions created the Federal Open Market Committee (FOMC), a 12-member panel that establishes target interest rates, and Regulation Q., which prohibited banks from paying interest on business checking accounts and capped rates on savings and other deposit accounts.

Created in the midst of the Great Depression, the Glass-Steagall Act was intended to put an end to speculative banking practices that led to the closure of dozens of financial institutions across the U.S. and were largely responsible for the nation’s economic collapse. Senator Carter Glass (D-VA) was the driving force behind the bill; it did not originally include the creation of the FDIC, which both Glass and then President Franklin D. Roosevelt opposed. Eventually, however, Glass joined forces with Representative Henry Steagall (D-AL), chairman of the House Banking and Currency Committee, who strongly supported the creation of the agency as a means of protecting the interests of small, rural banks. The legislation was amended to include the FDIC and was signed into law by Roosevelt on June 16, 1933

Throughout the 20th century, as private equity firms and commercial lenders changed the landscape of the banking industry, federal regulators gradually weakened many of the protections offered by the Glass-Steagall Act. By the 1980s, the Office of the Controller of the Currency and the FDIC issued rulings that allowed state-chartered, FDIC-insured banks to affiliate with securities firms and authorized the trading of mortgage-backed securities (MBS), municipal bonds and commercial paper by several U.S. banks. Then, in 1999, President Bill Clinton signed the Gramm-Leach-Bliley Act, which eliminated many provisions of Glass-Steagall and allowed banks to affiliate directly with security firms.

  1. What agencies were created by the Glass-Steagall Act?

    Learn about the Glass-Steagall Act of 1933 that significantly reformed the banking industry, and specifically, what government ... Read Answer >>
  2. How did the Glass-Steagall Act affect commercial and investment banking?

    Learn what the Glass-Steagall Act did for banking in the early 1900s. Learn why it was implemented and what economic era ... Read Answer >>
  3. What's the difference between investment banks and commercial banks?

    Understand the principal differences between investment banks and commercial banks, and the areas of banking services that ... Read Answer >>
  4. Did the repeal of the Glass-Steagall Act contribute to the 2008 financial crisis?

    Understand the argument that the repeal of the Glass-Steagall Act caused the 2008 financial crisis, and learn why the argument ... Read Answer >>
  5. Should commercial and investment banks be legally separated?

    Find out why market risk isn't created by letting commercial and investment banks merge; it results from moral hazard and ... Read Answer >>
  6. How does investment banking differ from commercial banking?

    Discover how investment banking differs from commercial banking, the responsibilities of each and how the two can be combined ... Read Answer >>
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