As unlikely as it might seem, 18 years after the repeal of the Glass-Steagall Act of 1933, the next president of the United States may make its reinstatement part of the financial services priorities for the next administration.
Democratic presidential candidate Bernie Sanders made the reinstatement of the Glass-Steagall one of the cornerstones of his campaign. The act provided a wall between commercial banks and investment banks, and its repeal by former president Bill Clinton in 1999 often is cited as encouraging banks to partake in risky investment activities such as derivative or swaps trade which helped contribute to the Great Recession.
Sanders’ promotion of Glass-Steagall earned him a concession from Democratic presumptive nominee Hillary Clinton, who pledged to add its reinstatement to the Democratic platform this year.
On Monday, Republican presumptive nominee Donald Trump threw his support behind the reinstatement of Glass-Steagall as well, getting it added to the Republican Party platform.
“We support reinstating the Glass-Steagall Act of 1933, which prohibits commercial banks from engaging in high-risk investment,” the Republican platform reads.
Trump campaign manager Paul Manafort told a press briefing that the move would help small banks that support Trump.
“We also call for reintroduction of the platform of Glass-Steagall so that would create barriers between what the big banks can do and avoid some of the crisis that led to 2008,” he told reporters. “The Obama-Clinton years have passed legislation that has been favorable to the big banks, which is why you see all the Wall Street money going to her.
“They (big banks) know she is their champion and they have supported her fully; we are supported by small banks and mainstream … that reflects some of the mistakes made in the repeal of Glass-Steagall and some of the mistakes made in imposing Dodd-Frank.”
In a note to clients, KBW’s Brian Gardner and Michael Michaud said any such move could lead to the breakup of the largest banks.
“Some might see the reinstatement of the law as a positive for the largest banks as it would force them to break up and possibly increase shareholder value but, depending on the details of any new law, it would also force the breakup of many regional banks and brokerage firms,” the wrote. “We explain why we think the risk that Glass-Steagall is eventually reinstated is higher than many realize…
“…[Any] mandated breakup of banks could be more disruptive than many people understand. Depending on the details of any law Congress might pass to reinstate Glass-Steagall, not only would the global systemically important banks (G-SIBs) be forced to separate their commercial and investment banking businesses, regional banks and brokers would also be forced to divest subsidiaries if they offer both investment and commercial banking services. Also, we assume that foreign banks operating in the U.S. would also be forced to sell their U.S. investment banking businesses.”
However, the pair said that just because the reinstatement is included in the platform doesn’t mean it will be a legislative priority.
“Political party platforms are not binding and are usually forgotten once a party’s convention ends,” they wrote. “However, the fact that the Democratic and Republican platforms both support a reinstatement of some form of Glass-Steagall suggests that there could be a unique political coalition forming to make changes to Dodd-Frank while at the same time reinstating the old separation between commercial and investment banking. …We think the risk that Congress will reinstate Glass-Steagall is higher than many investors appreciate.”
In the summer of 2015, a bi-partisan group led by Sens. Elizabeth Warren (D-Mass.) and John McCain (R-Ariz.) introduced a bill they called the 21st Century Glass-Steagall Act. They said the bill was “aimed at reduc[ing] risks to the financial system by limiting banks’ ability to engage in certain risky activities and limiting conflicts of interest, to reinstate certain Glass-Steagall Act protections that were repealed by the Gramm-Leach-Bliley Act, and for other purposes.”
Reinstating the act has been a policy priority for Warren, as it was for Sanders in the campaign.
“Despite the progress we’ve made since 2008, the biggest banks continue to threaten our economy,” Warren said at the bill’s introduction. “The biggest banks are collectively much larger than they were before the crisis, and they continue to engage in dangerous practices that could once again crash our economy.”