Securities Lawyers Blog
On November 12, 2013, Senator Elizabeth Warren warned that the “too big to fail” problem has only worsened since the 2008 financial crisis. JP Morgan Chase & Co., Bank of America Corp., Citigroup Inc., and Well Fargo & Co. each hold more than half of the total banking assets in the country. As large concentrations of wealth reside with a small number of banks, the possibility of another financial crisis looms unless certain reforms are implemented.
While the big banks become more concentrated and more complex, the Dodd-Frank Act’s implementation struggles. The agencies implementing the Dodd-Frank Act have missed more than 60% of the deadlines even though regulators continue to meet with various banks. Not only are regulators dragging their feet, but also the House recently passed two bills to delay provisions of the Dodd-Frank Acts. The Retail Investor Protection Act (RIPA) prevents the Department of Labor from defining circumstances under which an individual is considered a fiduciary. The Swaps Regulatory Improvement Act (SRIA) amends the swaps push-out requirement. The two bills passed by the House compound the delays of the regulatory implementation.
Although the House continues to hinder the Dodd-Frank Act, Senator Warren believes Congress needs to step in order to prevent another financial crisis. Senator Warren along with Senators John McCain, Maria Cantwell and Angus King urges the passage of the “21st Century Glass-Steagall Act.” As Senator Warren stated, the new Glass-Steagall Act, “would reduce failures of the big banks by making banking boring, protecting deposits, and providing stability to the system even in bad times.”
The original Glass-Steagall Act of 1933 was passed during the Great Depression to regulate the financial market. The major concern during the Great Depression was banks continued to engage in risky behavior and failed to invest into promoting the growth of the corporation. The Glass-Steagall Act created the Federal Depository Insurance Corporation (FDIC) and separated the commercial and investment banking in order to regulate the market and protect investors. The clear parameters drawn by the Glass-Steagall Act created a distinction between commercial and investment banking which reduced the risk associated with a financial market collapse.
In 1999 after numerous attempts to repeal Glass-Steagall Act, former President Clinton signed the Gramm-Leach Bliley Act. Under the Gramm-Leach Bliley Act, commercial banks, investment banks, securities firms and insurance companies were permitted to consolidate into one business entity. Critics attributed the 2008 financial crisis to the repeal of the Glass-Steagall Act. However, proponents of the Gramm-Leach Bliley Act contend market forces led to the financial crisis. The lines between commercial and investment banks had already crossed due to deregulation over the past few decades.
Nevertheless, investor protection and market stability is the cornerstone of the new legislation proposed by Senator Warren. A harsh critic of Wall Street, Senator Warren believes the 21st Century Glass-Steagall Act would tackle the missteps of the Gramm-Leach Bliley Act. The purpose of the 21st Century Glass-Steagall Act is to reduce market risk by limiting banking related activities and eliminating conflicts of interest between commercial and investment banks. The goal of the new legislation is to fill the gaps within the Dodd-Frank Act and avert another financial crisis.
By: Shazia Ahmad