Time for a Glass-Steagall Reprise?

Lehman bankruptcy anniversary summons too-big-to-fail memories.

By Bill Poquette, Editor-in-Chief

Sept. 15, 2018, marked the 10th anniversary of the collapse of Lehman Brothers, the fourth-largest and venerated U.S. investment bank that Fortune magazine had labeled a year earlier the No. 1 “most admired securities firm.” A primary cause for the debacle, which was to become a stark symbol of the financial crisis, was imprudent lending amidst the housing bubble.

The anniversary generated much comment in the financial press. Perhaps fortuitously, so did rumblings of interest in a new Glass-Steagall Act. The original, of course, was passed in 1933 to limit banks’ risky practices blamed for fostering the Great Depression. It was repealed by the Gramm-Leach-Bliley Act in 1999, after which some limits were reinstated by the Dodd-Frank Act.

In early September, the National Association of Federally-Insured Credit Unions launched a white paper pleading with Congress to revisit the Glass Steagall Act.

Specifically, the white paper says a 21st century Glass-Steagall Act could:

  • Protect consumers against future financial crises and help end the policy of “too big to fail”;
    Ensure traditional depositories and community-based financial institutions can continue to thrive in a stable financial marketplace;
  • Reduce the regulatory inequalities and moral hazard that arises when large banks take risks on consumer deposits to generate profits; and
  • Improve overall financial stability in times of severe stress by separating commercial and investment banking.

Since the passage of the Dodd-Frank Act, NAFCU points out, there have been several bipartisan bills in both the House and Senate restoring aspects of Glass-Steagall. Most recently, in 2017, Sen. Elizabeth Warren, D-Mass., the late Sen. John McCain, R-Ariz., and others introduced a bill to reinstate a modern version of the GSA.

Now, bankers will cringe at some points made by NAFCU in its white paper. For example:

“Although many of S. 2155’s provisions provide regulatory relief to small financial institutions, much more needs to be done to ensure that credit unions of all sizes are able to succeed. Unfortunately, recent measures aimed at granting credit unions additional regulatory flexibility have been attacked by various banking coalitions, who view any measure of relief afforded to credit unions as a competitive threat.”

But NAFCU concedes that regulatory burden and the pressure to consolidate affects more than just the credit union industry. “Community banks have experienced similar declines,” the document reads.

NAFCU may be trying to direct the conversation away from taxation and expansion, but leaving the bank-CU conflict for another day, is it time to consider a new Glass-Steagall Act?

JPMorgan Chase recently predicted another financial crisis looming in 2020, with stock markets losing about 20 percent, and energy prices falling 35 percent. Also in mid-September, an article on Bloomberg’s website noted that, “as the housing recovery and rising interest rates have eroded affordability, and the administration looks for more ways to loosen regulations, some worry that lenders will revive the previous era’s bad practices.”

This is worrisome. Bringing back Glass-Steagall won’t guarantee huge banks won’t be allowed to fail. But as NAFCU argues quite convincingly, it could help limit the economic impact of too-big-to-fail firms in the event of an economic downturn.

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