Senate's Glass-Steagall Act Revamp Is 'New.' Is It Improved?

A mutual feature of the Democratic and Republican campaign platforms inched closer to fruition Thursday as Sens. Elizabeth Warren, John McCain, Maria Cantwell and Angus King reintroduced the 21st Century Glass-Steagall Act.

But the update of the original Glass-Steagall Act, also known as the Banking Act of 1933, may not be much of an improvement, according to Height Securities.

“While the title says 21st Century, our read of the bill is that it’s very similar to the original Glass-Steagall Act and would force all banks and bank holding companies to exit investment banking activities,” Height analysts wrote in a Tuesday note.

Out With The Old

The old bill, inspired by the 1929 market crash, first separated depository and investment banks to prevent risky handling of depositor funds. According to a press release by Warren’s office, the required specialization protected taxpayers, heightened the competitiveness of community banks and credit unions, and diminished the chances of financial crises.

But the spirit of the measure was soon undermined. In the 1960s, new financial products blurred the roles of distinct bank categories, and in the 1980s, financial regulators began reinterpreting legal terms to further diminish the distinction. Then, the 1990s saw a complete repeal of affiliation provisions.

“Since core provisions of the Glass-Steagall Act were repealed in 1999, a culture of excessive risk-taking has taken root in the banking world, placing the financial security of millions of hardworking American taxpayers at risk," McCain said in a press release. "Even with the thousands of pages of misguided and burdensome regulations imposed by Dodd-Frank in the wake of the 2008 financial crisis, there are indications that this culture of risky behavior continues today. That's why I believe it is critical for Congress to reinstate the protections that separated main street banks and investment banks.”

In With The New

The 21st Century Glass-Steagall Act is intended to reestablish separation between commercial and investment banking to improve the security and stability of financial systems.

The proposed legislation essentially clarifies previously ambiguous terms that weakened the original Act. The bill would shrink “Too Big To Fail” financial institutions to prevent the need for future bailouts, and it would distinguish FDIC-insured depository banks from riskier institutions specializing in the likes of investment banking, insurance, hedge fund activities and swaps dealing.

The Particulars

The Act reinstatement has drawn support from both parties and the likes of Treasury Secretary Steve Mnuchin and National Economic Council Director Gary Cohn, the latter of whom reiterated President Donald Trump’s backing Friday.

Cohn offered no detail on the updated framework, but Height analysts expect the administration to “ringfence” investment and commercial banks — to separate their activities into distinct legal entities — rather than altogether separate them.

“This bill and Cohn’s comments are a good start to exploring the best way to strengthen the financial system and limit potential risks from investment banking activities, but a wholesale return to the complete separation of these activities is unlikely in our view,” the firm wrote.

The Financial Select Sector SPDR Fund XLF has dropped 0.87 percent since the Thursday bill introduction and now rests at a rate of $23.28.

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