The end of Glass-Steagall did not lead to the collapse of Wall Street in 2008, says Fed report


It is an article of faith in some political circles that the end of Great Depression era banking limits led to the 2008 financial crisis that devastated the US economy. The facts suggest otherwise.

New research from the New York Federal Reserve shows that U.S. banks began to legally engage in riskier business long before the 1933 law known as Glass-Steagall was scrapped in 1999.

Read:Were banks “boring” before Glass-Steagall was repealed?

Nicola Cetorelli, assistant vice chairman of the New York Fed’s research group, said banks began a rapid expansion in non-traditional businesses, such as stock trading and corporate lending, at the start of the decade. 1980s.

By 1999, the process was almost complete and banks actually slowed their expansion into new businesses in the early 2000s, according to his research.

Cetorelli drew his conclusions by examining how many banks formed holding companies between 1970 and 2016, taking into account the new services they offered. Banks usually turned into holding companies when they entered new, riskier businesses.

These bank holding companies were most aggressive throughout the 1980s, and again in the late 1990s, shortly before President Bill Clinton signed off on Glass-Steagall.

In the aftermath of the last recession, some lawmakers called for a modern Glass-Steagall replacement to avert another financial crisis and make banks ‘boring’ again. President Trump has offered some support, although most backers are Democrats.

Read also :Ignoring the chaos in Washington, companies likely kept hiring strong in July

But Cetorelli said there was little evidence the old Glass-Steagall Act – or a new version of it – would be an insurance policy against another financial crisis.

“Banking companies were already expanding their scope for a long time, so it’s not clear. this particular regulatory reform can be seen as the catalyst for the Great Recession a decade or so later, ”Cetorelli wrote. “It is also not immediately obvious that reinstating the restrictions per se would reduce the likelihood of a future crisis.”

Glass-Steagall was adopted by President Franklin Roosevelt to prevent a repeat of the Great Depression. The law separated the commercial banks which dealt with “Main Street” from the investment banks which carried out largely their business with Wall Street.

A series of legal and regulatory decisions began to shake Glass-Steagall from the 1960s. By 1999, Cetorelli noted, many of its restrictions had been removed or made obsolete.


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