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Deregulation
The Glass-Steagall Act of 1933 was the first major attempt at regulating the financial industry. The Act was passed by President Roosevelt with the objective of restoring public confidence in the banking system. Glass-Steagall sought to, among other things "prevent the undue diversion of funds into speculative operations," in response to the market crashes that had sparked the Great Depression (Maues, 2013). The reason for this was simple -- speculation was always a temptation for the banking industry, and if left unchecked the industry was likely to indulge in more speculation than the financial industry could sustain while performing at a high level of health and public confidence.
It has been argued that Glass-Steagall, for decades, had been able to prevent the type of accumulation in speculative assets within the banking system that occurred in the 2000s. Commercial and investment banking had been separated for this time, which meant that if investment banks wanted to engage in speculation, their failure would not affect the commercial banking system. In 1999, this separation was ended with legislation that essentially set the tone for the Great Recession a few years later. The basic principle is that now commercial banks were now able...
The normal relationship between risk and return works two ways -- you can assume that with more risk you will get a better return, but risk is just volatility. The reality is that these banks were unprepared for the volatility associated with their positions -- that is to say they had very quickly become overleveraged (Rickards, 2012).
The changes in 1999 came about with the Financial Services Modernization Act, which sought to remove many of the restrictions that Glass-Steagall placed on the banking industry. The initial reactions to this act were positive from the industry. The FSMA were an increase in stock prices for investment banks, and predictions of potential gains from economies of scope, market power and the implicit extension of government guarantees ("too big to fail") to banking affiliates (Carow, 2002). It was somewhat surprising that commercial banks did not respond much to the new laws, whereas investment banks and insurance companies did. The market expected, perhaps, the acquisition of these companies by the major commercial banks. But in the years after 1999, the larger institutions in all categories earned abnormal returns (Hendersholt, Lee…
References
Carow, K. (2002). Capital market reactions to the passage of the Financial Services Modernization Act of 1999. Indiana University. Retrieved November 24, 2014 from http://www.researchgate.net/publication/223218603_Capital_market_reactions_to_the_passage_of_the_Financial_Services_Modernization_Act_of_1999/file/50463524b87589f488.pdf
Grant, J. (2009-2010). What the financial services industry puts together let no person put asunder: how the Gramm-Leach-Billey Act contributed to the 2008-2009 American capital markets crisis. Albany Law Review. Vol. 73 (2009-2010) 371.
Hendersholt, R., Lee, J. & Thompkins, J. (2002). Winners and losers as financial service providers converge: Evidence from the Financial Services Modernization Act of 1999. The Financial Review. Vol. 37 (1) 53-72.
Maues, J. (2013). Banking Act of 1933, commonly called Glass-Steagall. Federal Reserve Bank of St. Louis. Retrieved November 24, 2014 from http://www.federalreservehistory.org/Events/DetailView/25
Rickards, J. (2012). Repeal of Glass-Steagall caused the financial crisis. U.S. News and World Report. Retrieved November 24, 2014 from http://www.usnews.com/opinion/blogs/economic-intelligence/2012/08/27/repeal-of-glass-steagall-caused-the-financial-crisis
Banking Regulation Captain -- You Do See That Blinking Light, Don't You? An apocryphal story about an unnamed navy captain goes like this. The ship in question is sailing at a not insignificant clip on a very overcast night close to shore in preparation for docking. A number of sailors who are above deck see a blinking light in the distance that clearly -- to them -- appears to be a lighthouse.
This indicates that the Australian system has sufficient regulatory oversight to keep high-risk obligations to a minimum. Despite being well-positioned from the outset, Australian banks remain saddled with some toxic assets (worthless MBSs and securities backed by insolvent financial institutions). Moreover, they found themselves at a competitive disadvantage. When foreign banks received government backing, their credit rating improved to the level of government securities. This resulted in a disadvantage to
Banking Fees and Morality Integrating Values: The Legal, Moral, and Social Responsibility of the Government, the Banks, and the Consumers Legal Section Statement of Relevant Legal Principles and Rules of Law Application of Law to Topic and Legal Analysis Ethics Section Utilitarian Ethical Analysis Kantian Ethical Analysis Additional Ethical Analysis Social Responsibility Section Introduction to B. Definition of term "Social Responsibility" Application of Social Responsibility Banking fees in one form or another have existed in the United States hundreds of years, however the
Published out of Ohio State University, the journal is dedicated to "reporting major findings in the study of monetary and fiscal policy, credit markets, money and banking, portfolio management, and related subjects" (Cato 1996). The breadth of this journal's coverage ensures its continued relevance, and not only the wide readership but the large number of submissions the journal receives -- which allows its editors to choose carefully from among
Forces Leading to Changes in the Banking Industry The banking sector is one of the strongest industries in the whole wide world which has been thought to be one of the industries that is incapable of feeling the adverse effects of a recession. This is not to mean that the industry does not feel any effects, rather it means that the effects felt are not as wide scale as those felt
190). The Act also helped to create a "too-big-to-fail" mindset (Walter, 2004) that would have profound implications during the economic downturn of 2008 and beyond. 6. Why did you include this piece of legislation in your list? The Act is described by Sammin (2004) as being "the biggest revision in financial services law since the Great Depression" (p. 653). Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 1. What were the problems/conditions giving