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Congress, Trump Consider Splitting Commercial and Investment Banking

May 17, 2017

White House Press Secretary Sean Spicer says President Donald Trump supports “a 21st century Glass-Steagall,” referring to proposals to restore financial regulations prohibiting banks from engaging in commercial and investment banking.

White House Press Secretary Sean Spicer says President Donald Trump supports “a 21st century Glass-Steagall,” referring to proposals to restore financial regulations prohibiting banks and financial institutions from engaging in commercial and investment banking.

In May, Spicer told reporters, “The President’s pro-growth agenda, including instituting what he has called a 21st century Glass-Steagall, will allow these banks to spend less time complying with unnecessary requirements, many of which were designed to police much larger entities, and more time infusing their communities and local small businesses with capital.”

In an April interview with Bloomberg, Trump said he was considering pushing for bringing back the financial regulations, which were removed by lawmakers in 1999.

“I’m looking at that right now,” Trump said in the interview. “There’s some people that want to go back to the old system, right? So, we’re going to look at that.”

In April, Senate Bill 881, titled the 21st Century Glass-Steagall Act, was introduced by Sen. Elizabeth Warren (D-MA) and referred to the Committee on Banking, Housing, and Urban Affairs, where it awaits a hearing.

Steady Growth … of Government

Bruce Tuckman, a finance professor at New York University’s Stern School of Business, says the solution to a government-created problem is not more government.

“The banking system and many individual banks are likely too big and too risky, because the government excessively encourages credit creation through, for example, underpriced deposit insurance and mortgage guarantees,” Tuckman said. “Financial stability would be best advanced by removing these credit-market distortions, not by preventing banks from engaging in relatively safe and risk-diversifying businesses like investment banking.”

Tuckman says splitting up the banks would make them less useful and wouldn’t solve the risk problems.

“Many banks and nonbanking financial institutions took too much risk in the years leading up to the financial crisis, and the government felt obliged to save them to protect the broader economy,” Tuckman said. “The solution, however, is not to reduce the scope and usefulness of bank activities in ways that will not necessarily reduce risks to the financial system.”

Big Bank Protections

John Berlau, a senior fellow with the Competitive Enterprise Institute, says Glass-Steagall protected big banks instead of protecting consumers.

“Glass-Steagall greatly reduced competition to Wall Street from hometown banks,” Berlau said. “It meant that if you were an entrepreneur wanting to take your company public, you had to go through a Wall Street investment bank such as Goldman Sachs or Lehman Brothers, rather than a bank in your city, because Glass-Steagall prohibited small banks from performing this.”

An Anti-Entrepreneurial History

Glass-Steagall discouraged entrepreneurship by restricting access to investment capital, Berlau says.

“In 1919, about 15 years before enactment of Glass-Steagall, Atlanta-based Coca-Cola went public through the local Trust Company of Georgia, a predecessor of SunTrust bank,” Berlau said. “Georgians were able to get the first shares of stock and grow wealthy with a home-state company. But if Coca-Cola went public after Glass-Steagall, it would most likely have had to work with a Wall Street investment bank to do so.”

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