The Glass-Steagall repeal and its role in financial deregulation

Glass Steagall

Glass-Steagall

Congress voted in November of 1999 to repeal the depression-era act that separated the commercial and investment banking industries which blurred the distinction between commercial and investment banking considerably (Fraser & Hebb, N.d.). This gave banks substantially more power to design operations and took a long-term effort to tear down all the legal walls. Some have argued that this also introduced a "culture of recklessness" (Weissman & Donalue, 2009). The area two specific areas, the regulatory environment that created the asset bubble in the mortgage-based collateral and the rapid growth of structured instruments, that led to the mortgage industry "mispricing" various assets that ultimately led to the crash of investor's confidence in the entire financial system (Ngassam, 2013).

The argument that was used to justify bank deregulation was that the public would ultimately be better off by banks having more control over their operations, markets, and investment activities. It was also argued that regulations were redundant because the market and competition would act to naturally regulate the industry through competition and natural mechanisms. This would in turn lead to more product innovations and consumers would be able to drive this trend by choosing which products and services that they valued. Another item that also drove the move to deregulation was technology. Significant advancements in technology made infrastructure possible that could not only give banks more control of their activities and streamline accounting tasks. This worked to reduce transaction costs giving banks an advantage to move towards greater quantities of scale.

After the banks became deregulated they were also now permitted to grow larger through mergers and acquisitions. Thus larger banks bought up smaller banks quickly and as a result the entire industry consolidated rapidly. The consumer generally benefited from these acquisitions because they now had access to a wider range of products and services. Not only did the power of banks expand domestically, but this trend covered the global on a large scale. Many countries signed treaties and trade agreements that that allowed financial institutions to move beyond international borders while bypassing significant regulations.