The Banking Act of 1933, commonly known as the Glass-Steagall Act, was a landmark piece of legislation in the United States enacted in response to the financial difficulties of the Great Depression. It was sponsored by Senator Carter Glass and Representative Henry B. Steagall and signed into law by President Franklin D. Roosevelt on June 16, 1933.
The primary objectives of the Glass-Steagall Act were to address the perceived conflicts of interest in the banking sector and to establish a regulatory framework to stabilize the financial system. The key provisions of the Act included the following:
- Separation of Commercial and Investment Banking: One of the central tenets of the Glass-Steagall Act was separating commercial banking activities from investment banking activities. Commercial banks were prohibited from underwriting and dealing securities, while investment banks were restricted from accepting deposits.
- Creation of the Federal Deposit Insurance Corporation (FDIC): The Act established the FDIC to provide insurance for bank deposits, thereby increasing public confidence in the banking system. The FDIC insured deposits up to a certain amount, protecting depositors from losses in the event of a bank failure.
- Regulation of Securities Activities: The Glass-Steagall Act also aimed to regulate securities activities more effectively. It established the Securities and Exchange Commission (SEC) to oversee and enforce securities laws, ensuring greater transparency and accountability in the financial markets.
The Glass-Steagall Act was a significant piece of financial regulation for several decades. However, it underwent important changes and erosion over time. The Gramm-Leach-Bliley Act of 1999, also known as the Financial Services Modernization Act, repealed the restrictions on affiliations between commercial banks and securities firms. This repeal marked a significant departure from the principles of the Glass-Steagall Act and allowed for the creation of financial conglomerates engaging in both commercial and investment banking activities.
The Glass-Steagall Act is often discussed in debates over financial regulation and the causes of the 2008 financial crisis. Some proponents of financial reform have called for a modern version of Glass-Steagall to reinstate a separation between commercial and investment banking activities.
