Separation of investment and retail banking
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The separation of investment and retail banking aims to protect the "utility" aspects of day-to-day banking from being endangered by losses sustained by higher-risk investment activities ("casino banking"). This can take the form of a two-tier structure in which a company is banned from doing both activities, or enforcing a legal ring-fence between two divisions of a company. Banks have resisted this separation saying that it increases costs for consumers.
Historically retail banks have used cash deposited by savers for investment activities. Following the
Since then governments have tried to reduce the likelihood of future bailouts by separating investment banking and retail banking. The United States response came in the form of the
Mechanisms
Glass–Steagall insisted that investment and retail banking were performed by completely separate organisations. More recent legislation in Europe has concentrated on setting up legal barriers between different divisions of the same bank, to protect retail deposits from investment losses; Liikanen required the biggest investment divisions to hold their own capital for trading purposes.
Disadvantages
The banks have resisted efforts to split investment and retail banking on the grounds that it would cost billions to establish and reduce their profits.
Eurozone
The Liikanen report or "Report of the European Commission’s High-level Expert Group on Bank Structural Reform" was published in October 2012 by a group of experts led by Erkki Liikanen, governor of the Bank of Finland and ECB council member.[1]
Japan
A series of bank failures in the mid 1920s led to the Bank Law of 1927, which defined the regular business of banks as deposit-taking, money-lending, discounting of bills and notes, and exchange transactions whilst prohibiting them from engaging in other business. But it allowed banks to hold the shares of other companies (later restricted by the Antimonopoly Law of 1947), and did not restrict the use of shares as securities for loans. Article 65 of the Securities and Exchange Law of 1948 was modelled after the Glass-Steagall legislation in the US, but allows banks to hold securities for investment purposes so does little to protect depositors. The Bank Law of 1981 allowed banks to deal in government bonds.[2]
United Kingdom
The Independent Commission on Banking, chaired by John Vickers, was established in June 2010 and produced its final report in September 2011. Its headline recommendation was that British banks should 'ring-fence' their retail banking divisions from their investment banking arms to safeguard against riskier banking activities,[3] but it also made a number of other recommendations on bank capital requirements and competition in retail banking.[4] The government announced the same day that it would introduce legislation into Parliament aimed at implementing the recommendations.
United States
The
By that time, many commentators argued Glass–Steagall was already "dead". Most notably,
Many commentators have stated that the GLBA's repeal of the affiliation restrictions of the Glass–Steagall Act was an important cause of the
References
- ^ Liikanen; et al. (October 2, 2012). "High-Level Expert Group on Reforming the Structure of the EU Banking Sector" (PDF). EU. Retrieved 4 Oct 2012.
- ^ TATSUTA, Misao (1982). "SECURITIES ACTIVITIES OF JAPANESE BANKS" (PDF). Journal of Comparative Corporate Law and Securities Regulation. 4: 259–274.
- ^ "Banks face major reorganisation". BBC News. BBC. 12 December 2011. Retrieved 12 September 2011.
- ^ "Banking Reforms Must Work For Customers". Vanquis Bank Ltd. 12 September 2011. Retrieved 13 September 2011.
- ^ Carpenter, David H.; Murphy, M. Maureen (2010a), "Permissible Securities Activities of Commercial Banks Under the Glass–Steagall Act (GSA) and the Gramm-Leach-Bliley Act (GLBA)" (PDF), Congressional Research Service Report, no. R41181, p. 10, archived from the original (PDF) on August 4, 2012, retrieved February 10, 2012
- ^ "Money, power, and Wall Street: Transcript, Part 4, (quoted as "The Glass–Steagall law is no longer appropriate—")". April 24 and May 1, 2012; encore performance July 3, 2012. PBS. Retrieved October 8, 2012. Transcript of Clinton remarks at Financial Modernization bill signing, Washington, D.C.: U.S. Newswire, November 12, 1999 ("It is true that the Glass-Steagall law is no longer appropriate to the economy in which we lived. It worked pretty well for the industrial economy, which was highly organized, much more centralized and much more nationalized than the one in which we operate today. But the world is very different.")
- ^ Kuttner, Robert (October 2, 2007), "The Alarming Parallels Between 1929 and 2007", The American Prospect: 2, retrieved February 20, 2012.
- ^ Stiglitz, Joseph E. (9 December 2008). "Joseph E. Stiglitz on capitalist fools". Vanity Fair. Retrieved 2016-09-11.
- ^ White, Lawrence J. (2010), "The Gramm-Leach-Bliley Act of 1999: A Bridge Too Far? Or Not Far Enough?" (PDF), Suffolk University Law Review, 43 (4): 938 and 943–946, retrieved February 20, 2012. Markham, Jerry W. (2010), "The Subprime Crisis—A Test Match For The Bankers: Glass–Steagall vs. Gramm-Leach-Bliley" (PDF), University of Pennsylvania Journal of Business Law, 12 (4): 1092–1134, retrieved February 20, 2012.
- ^ "FRB: Speech--Bernanke, Monetary Policy and the Housing Bubble--January 3, 2010". www.federalreserve.gov. Retrieved 2016-09-11.
- ^ Mester, Loretta J. "Optimal industrial structure in banking." (2005).