The Long and Bumpy Road to Glass-Steagall Reform: A Historical and Evolutionary Analysis of Banking Legislation - Other Articles - Glass-Steagall Banking Act of 1933

American Journal of Economics and Sociology, The, Oct, 2001 by Jill M. Hendrickson

A. 1988 Legislative Reform Attempt

Ultimately, the initial legislative attempt at repealing the Glass-Steagall provisions failed because the House and Energy and Commerce Committee were unable to compromise. The central issues throughout the 1988 debate were bank securities powers, insurance powers, and appropriate fire walls separating banks and securities affiliates. (5) Though the House and Senate bills largely were in agreement on these issues, (6) the Energy and Commerce Committee bill contained tighter restrictions on all of the central issues. Further, Energy and Commerce, which was responsible for securities regulation, was charged by the House with overstepping the Banking Committee's jurisdiction over banks' securities activities. This power struggle, coupled with the end of the congressional session, led to the demise of the 1988 Glass-Steagall reform efforts.

In terms of different interest group positions, large commercial bankers were in favor of expanded bank powers in the area of securities investments. This support stemmed from their desire to have more equal opportunities to compete with non-banks and banks both domestically and abroad and to adjust to the dynamic changes within the financial services sector. The large bank position is summed up well in a statement made by Roberto G. Mendoza, Executive Vice President of Morgan Guaranty Company:

[W]e cannot be complacent about the competitive position of our financial markets. We believe that one of the primary reasons, but not the only one, for these unfortunate developments is the anticompetitive effects of the Glass-Steagall Act. Not only does the Glass-Steagall Act preclude full and open competition among financial services firms in the United States, but it also significantly constrains their ability to compete in capital markets. (U.S. Congress 1987, p. 42)

Small banks, in contrast, were largely opposed to any Glass-Steagall reform, fearing it would lead to large banking conglomerates that would run them out of business. The Independent Bankers Association of America opposed the various versions of the reform bill on the grounds that they would concentrate power in the hands of a few large banks and securities firms (Congressional Quarterly Almanac 1988, p. 232).

Like the large commercial banks, large securities firms were in favor of regulatory change. The securities firms were interested in expanding into commercial banking, just as the bankers were eager to expand into the securities business. Many argued that the weakened state of the commercial banking sector was a reflection of the limitations placed on banks by the Glass-Steagall provisions. Further, the poorly performing commercial banking sector was seen as evidence that the entire financial system in the United States was faltering. From this perspective, reform was needed to aid the entire industry, not just commercial banks.

Insurance firms were opposed to any increases in insurance powers for commercial banks, as this was seen as an expansion and increase in competition. However, once the bill's provisions were changed so that bank holding companies could sell insurance only in the home state of the holding company, provided the state allowed this, insurance lobbyists praised the bill.