Following the recent financial crisis, many people are blaming the large banks almost solely for the collapse. Many feel that the banks must split their commercial banking divisions from their investment banking ones. People think that the banks should not be allowed to use the money they hold for customers in speculative investments for the bank's potential profit. Do these concerns sound familiar?
If not, they should. It is almost verbatim to what was being said immediately following the 1929 Stock Market Collapse, which led to the Great Depression. The Economic History Association has a great – albeit lengthy – read on how speculation was a major factor in that collapse. Arguably, there were no international crises the scale of 1929 until this just recent one.
One of Franklin Roosevelt’s responses to 1929 was the Glass-Steagall Act. The Glass-Steagall Act had many purposes: it gave the Federal Reserve increased regulatory powers, created the Federal Deposit Insurance Corporation (FDIC), and prohibited commercial holding banks from engaging in the investment business.
Ironically enough, the Glass-Steagall Act was repealed not too long ago by the Gramm-Leach-Bliley Act of 1999. All of a sudden, the major holding banks could buy – and consolidate with – investment banks, and vice versa.
Banks started to swell to immense proportions – until the financial crisis.
The United States government recently passed a large piece of regulation called the Frank-Dodd Act. Hidden inside is the “Volcker Rule.” The Volcker Rule was intended to force banks to separate their speculative, investment divisions from their commercial, holding divisions.
Clearly this does not sit well with the banks, which enjoy having the security of their holding divisions with the profits of their investment ones.
The United Kingdom is trying to implement their version of the Volcker Rule. However, Barclays and HSBC, two of the country’s largest banks, have either appointed or are in the process of appointing former investment bankers as their new leaders. Both have come out on record as saying they will consider moving their headquarters away from London if the government forces them to separate their divisions.
What do you think? Should banks be forced to choose between the two divisions? Or should the government leave the banks alone?