Old Money: Glass-Steagall – new and old

Talk of a ‘21st Century Glass-Steagall’ is swirling around Washington and Wall Street. What this might mean in practice is hazy, but the phrase Glass-Steagall is plainly a powerful political talisman.

  • By Richard Roberts
  • 07 Jun 2017
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The Glass-Steagall Act is the informal name for the Banking Act 1933, a flagship measure of President Roosevelt’s New Deal. It derives from its Democrat co-sponsors, Senator Carter Glass and Representative Henry Steagall. Its key features were: (1) the separation of commercial banking (deposit taking) and investment banking (securities underwriting and dealing); and (2) federal deposit insurance.

Glass, aged 75 in 1933, had been the principal sponsor of the Glass-Owen bill of 1913 that established the Federal Reserve System. 

He was secretary of the Treasury in 1918-20 and regarded as Congress’s foremost authority on finance. Glass considered the creation of the America’s central bank, which he believed had brought financial stability and economic prosperity to the country, his greatest achievement. The 1929 crash, ensuing depression and bank turmoil — 11,000 of America’s 25,000 banks failed or merged in 1929-33 — was taken by Senator Glass as a bitter personal blow. It set him on a three-year quest to identify and rectify the factors that had crippled his system.

Banks’ involvement with securities began in the early 1920s through the creation of "securities affiliates" that undertook securities underwriting and sales to the public; they mushroomed in the late 1920s and by 1930, 300 banks had such affiliates making them formative universal banks. 

They were very successful in taking market share from the specialist investment banks that dominated the business; between 1927 and 1930, commercial banks’ share of underwriting origination doubled from 22% to 45%. Glass believed that bank involvement with securities was contrary to sound banking, and concluded that this new development that was responsible for stock market speculation and the crash, as well as the rash of bank failures.

Glass’s cause was boosted by the sensational failure of Bank of United States (note the missing ‘the’), New York’s third largest bank with 62 branches and 440,000 depositors, in December 1930.

The causes of the bank’s failure were real estate loans, overpaying for acquisitions and fraud, but public attention focused on its shady tangle of 59 affiliates; in fact, securities were a small part of their activities (mostly real estate speculation) but the scandal helped to establish bank affiliates as objects of public suspicion. A Glass Banking Bill banning bank securities affiliates was introduced in 1931 and 1932, but with a Republican administration in office, it got nowhere.

The landslide victory of Democrat reformer Franklin Roosevelt in the November 1932 presidential election improved the prospects, and Glass reintroduced his bill in January 1933. 

In February, as the bill passed through Congress, the sensational revelations of the Pecora Hearings about abuses by bankers generated near-hysterical public rage against bankers; opposition to Glass’s bill evaporated.

In the House, Representative Henry Steagall proposed combination with his own bill introducing deposit insurance. Glass was displeased but acquiesced. Roosevelt also disliked deposit insurance but signed the bill to avoid further hearings and assuage public anger with bankers. 

That put paid to US universal banking.

Glass-Steagall happily coincided with the decline of bank failures and got credit for it in the public mind. 

But subsequent investigation established that, in fact, commercial banks with securities affiliates were substantially less likely to fail in the early 1930s than counterparts without securities affiliates, and there was little basis for allegations of abuses. 

Not that such realities would have mattered even if they had been known. In the circumstances of 1933, acquiescence with Glass-Steagall suited all interests. 

For the commercial banks, sacrificing an activity that was no longer profitable was a cheap way of placating public fury. The specialist investment banks were delighted with the serendipitous disappearance of formidable competitors. Congress could claim credit for protecting small depositors from loss and appeared to be doing something about the banking crisis. The president and the executive branch demonstrated that it was turning New Deal rhetoric into action.

And Carter Glass, once again, saw his vision of the American financial system become law. And so American banking was set on its singular path for the next six decades. 

Would a new Glass-Steagall spell the unravelling of America’s new generation of universal banks?

  • By Richard Roberts
  • 07 Jun 2017

All International Bonds

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1 Citi 280,892.95 1037 8.97%
2 JPMorgan 256,461.06 1168 8.19%
3 Bank of America Merrill Lynch 250,468.43 865 8.00%
4 Goldman Sachs 192,174.73 616 6.14%
5 Barclays 184,453.95 705 5.89%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
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1 HSBC 28,971.26 117 7.01%
2 Deutsche Bank 27,415.35 91 6.63%
3 Bank of America Merrill Lynch 25,509.39 71 6.17%
4 BNP Paribas 21,729.97 121 5.26%
5 Credit Agricole CIB 19,966.59 113 4.83%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
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1 JPMorgan 13,671.74 61 7.87%
2 Citi 12,076.06 76 6.95%
3 Morgan Stanley 11,899.85 66 6.85%
4 UBS 11,800.30 47 6.80%
5 Goldman Sachs 11,111.93 58 6.40%