Glass-Steagall Act
Quick Definition
A 1933 law that separated commercial banking from investment banking to reduce conflicts of interest and protect depositors.
Key Takeaways
- Separated commercial banking from investment banking after the Great Depression
- Created the FDIC to insure bank deposits
- Repealed in 1999 by the Gramm-Leach-Bliley Act
- Its repeal is widely debated as a contributing factor to the 2008 financial crisis
- The Volcker Rule in Dodd-Frank partially restored some of its restrictions
What Is Glass-Steagall Act?
The Glass-Steagall Act, officially the Banking Act of 1933, was landmark legislation that erected a wall between commercial banking (deposit-taking and lending) and investment banking (securities underwriting and trading). The law was enacted in response to the bank failures of the Great Depression, during which banks had used depositors' money to speculate in securities markets. Glass-Steagall also created the FDIC to insure bank deposits. The act's separation provisions were gradually eroded through regulatory interpretations in the 1980s and 1990s, and were formally repealed by the Gramm-Leach-Bliley Act of 1999, allowing the formation of financial conglomerates like Citigroup. Many economists argue that the repeal contributed to the conditions that led to the 2008 financial crisis.
Glass-Steagall Act Example
- 1Under Glass-Steagall, JPMorgan was split into JPMorgan (commercial bank) and Morgan Stanley (investment bank) — they later reunited after the law's repeal.
- 2Critics of the Gramm-Leach-Bliley Act argue that repealing Glass-Steagall allowed banks to take excessive risks with depositor funds, contributing to the 2008 crisis.
Related Terms
FDIC
Independent federal agency that insures bank deposits up to $250,000 per depositor, per institution, and supervises financial institutions for safety and soundness.
Dodd-Frank Act
Comprehensive financial reform legislation enacted in 2010 to reduce systemic risk and protect consumers after the 2008 financial crisis.
Volcker Rule
A provision of the Dodd-Frank Act that restricts banks from engaging in proprietary trading and limits their investments in hedge funds and private equity.
Chinese Wall
An information barrier within a financial institution that prevents the sharing of confidential information between departments to avoid conflicts of interest.
SEC (Securities and Exchange Commission)
The primary U.S. federal agency responsible for regulating securities markets, protecting investors, and enforcing federal securities laws.
Insider Trading
The illegal practice of trading securities based on material, non-public information obtained through a position of trust or confidence.
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