The Glass–Steagall legislation was enacted by the United States Congress in 1933 as part of the 1933 Banking Act, amended as part of the 1935 Banking Act, and most of it was repealed in 1999 by the Gramm–Leach–Bliley Act (GLBA). Its protections and restrictions had also been chipped away during most of its existence by lenient regulatory interpretations and use of loopholes. After Glass–Steagall's 1999 repeal, there was a great deal of discussion in the banking and securities industries, and among policymakers and economists, about the practical positive and negative changes to the business and consumer environment. Later, as financial crises and other issues played out in the United States and even worldwide, arguments have broken out about whether Glass–Steagall, as originally intended, would have prevented these issues.
Commentator response to Section 20 and 32 repeal President Bill Clinton's signing statement for the GLBA summarized the established argument for repealing Glass–Steagall Section's 20 and 32 in stating that this change, and the GLBA's amendments to the Bank Holding Company Act, would "enhance the stability of our financial services system" by permitting financial firms to "diversify their product offerings and thus their sources of revenue" and make financial firms "better equipped to compete in global financial markets."
With Salomon Smith Barney already operating as a Section 20 affiliate of Citibank under existing law, commentators did not find much significance in the GLBA's repeal of Sections 20 and 32. Many commentators noted those sections "were dead" before the GLBA.
The GLBA's amendment to the Bank Holding Company Act to permit banks to affiliate with insurance underwriting companies was a new power. Under a 1982 amendment to the Bank Holding Company Act, bank affiliates had been prohibited from underwriting most forms of insurance. Because the GLBA permitted banks to affiliate with insurance underwriters, Citigroup was able to retain ownership of the Travelers insurance underwriting business. Overall, however, commentators viewed the GLBA "as ratifying and extending changes that had already been made, rather than as revolutionary."Barth et al. 2000, p. 196. At least one commentator found the entire GLBA "unnecessary" for banks and suggested the OCC had the authority to grant national banks all the insurance underwriting powers permitted to affiliates through the GLBA.Fisher 2001, pp. 1337-1367.
As John Boyd had earlier, Minneapolis Federal Reserve Bank president Gary Stern and Arthur Wilmarth warned that the GLBA's permission for broader combinations of banking, securities, and insurance activities could increase the "too big to fail" problem.Stern 2000. Stern and Feldman 2004, p. 77
Financial industry developments after repeal of Sections 20 and 32
Citigroup gives up insurance underwriting The GLBA permitted Citigroup to retain the Travelers property, casualty, and life insurance underwriting businesses beyond the five-year "divestiture" period the Federal Reserve Board could have permitted under the pre-GLBA form of the BHCA. Before that five-year period elapsed, however, Citigroup spun off the Travelers property and casualty insurance business to Citigroup's shareholders.. In 2005 Citigroup sold to Metropolitan Life the Travelers life insurance business.. Commentators noted that Citigroup was left with selling insurance underwritten by third parties, a business it could have conducted without the GLBA.Heyward 2005, p. 1.
Banking, insurance, and securities industries remain structurally unchanged In November 2003, the Federal Reserve Board and the Treasury Department issued to Congress a report (Joint Report) on the activities of the "financial holding companies" (FHCs) authorized by the GLBA and the effect of mergers or acquisitions by FHCs on market concentration in the financial services industry. According to the Joint Report, 12% of all bank holding companies had qualified as financial holding companies to exercise the new powers provided by the GLBA, and those companies held 78% of all bank holding company assets. 40 of the 45 bank holding companies with Section 20 affiliates before 2000 had qualified as financial holding companies, and their securities related assets had nearly doubled. The great majority of this increase was at non-U.S. based banks. Such foreign banking companies had acquired several medium-sized securities firms (such as UBS acquiring Paine Webber and Credit Suisse acquiring Donaldson, Lufkin & Jenrette).
Despite these increases in securities activities by bank holding companies that qualified as financial holding companies, the Joint Report found that concentration levels among securities underwriting and dealing firms had not changed significantly since 1999.. Ranked by capital levels, none of the four largest securities dealing and underwriting firms was affiliated with a financial holding company. Although the market share of financial holding companies among the 25 largest securities firms had increased by 5.7 percentage points from that held in 1999 before the GLBA became effective, all of the increase came from foreign banks increasing their U.S. securities operations. The combined market share of the five largest U.S. based financial holding companies declined by 1 percentage point from 1999 to 2003, with the largest, Citigroup, experiencing a 2.4 percentage point reduction from 1999 to 2003. Of the 45 bank holding companies that had operated Section 20 affiliates before the GLBA, 40 had qualified as financial holding companies, 2 conducted securities underwriting and dealing through direct bank subsidiaries (i.e., "financial subsidiaries"), and 3 continued to operate Section 20 affiliates subject to pre-GLBA rules.
In a speech delivered shortly before the Joint Report was released, Federal Reserve Board Vice Chairman Roger Ferguson stated that the Federal Reserve had "not been able to uncover any evidence that the overall market structure of the [banking, insurance, and securities] segments of the financial services industry has substantially changed" since the GLBA.. Early in 2004, the Financial Times reported that "financial supermarkets" were failing around the world, as both diversification and larger size failed to increase profitability. The Congressional Research Service noted that after the GLBA became law the financial services markets in the United States "had not really integrated" as mergers and consolidations occurred "largely within sectors" without the expected "wholesale integration in financial services.".
At a July 13, 2004, Senate Banking Committee hearing on the effects of the GLBA five years after passage, the Legislative Director of the Consumer Federation cited Roger Ferguson's 2003 speech and stated the "extravagant promises" of universal banking had "proven to be mostly hype." He noted that advocates of repealing Sections 20 and 32 had said "[b]anks, securities firms, and insurance companies would merge into financial services supermarkets" and, after five years, some mergers had occurred "but mostly within the banking industry, not across sectors.". Within the banking industry, Federal Reserve Board Chairman Alan Greenspan testified to Congress in 2004 that commercial bank consolidation had "slowed sharply in the past five years.".
At the five-year anniversary of the GLBA in November 2004, the American Banker quoted then retiring Comptroller of the Currency John D. Hawke Jr. and former FDIC Chairman William Seidman as stating the GLBA had been less significant than expected in not bringing about the combinations of banking, insurance, and investment banking. Hawke described the GLBA provisions permitting such combinations as "pretty much a dead letter.". Although the article noted other commentators expected this would change in 2005, a May 24, 2005, American Banker article proclaimed 2005 the "year of divestiture" as "many observers" described Citigroup's sale of the Travelers life and annuity insurance business as "a nail in the coffin of financial services convergence."
In 2005, the St. Louis Federal Reserve Bank's staff issued a study finding that after five years the GLBA's effects "have been modest" and the new law "simply made it easier for organizations to continue to engage in the activities they had already undertaken.".
Competition between commercial banking and investment banking firms Commentators pointed to the Enron, WorldCom, and other corporate scandals of the early 2000s as exposing the dangers of uniting commercial and investment banking. . More broadly, Arthur Wilmarth questioned whether those scandals and the "stock market bubble" of the late-1990s were linked to the growing role of commercial banks in the securities markets during the 1990s. As Wilmarth's article indicated, the identified bank or bank affiliate activities linked to the Enron and World Com corporate scandals began in 1996 (or earlier) and most occurred before March 11, 2000, when bank holding companies could first use the new securities powers the GLBA provided to "financial holding companies".
In the 1990s, investment banks complained that commercial banking firms with Section 20 affiliates had coerced customers into hiring the Section 20 affiliate to underwrite securities in order to receive loans from the affiliated bank, which would have violated the "anti-tying" provisions of the Bank Holding Company Act. In 1997, the GAO issued a report reviewing those claims.. After the GLBA became law, investment banks continued to claim such illegal "tying" was being practiced. In 2003, the GAO issued another report reviewing those claims..
Partly because of the "tying" issue many commentators expected investment banking firms would need to convert into bank holding companies (and qualify as financial holding companies) to compete with commercial bank affiliated securities firms.. Eaton 1995, pp. 1188-1189 and 1214-1219. No major investment bank, however, became a bank holding company until the 2008 financial crisis. Then, all five major "free standing" investment banks (i.e., those not part of a bank holding company). either entered bankruptcy proceedings (Lehman Brothers), were acquired by bank holding companies (Bear Stearns by JP Morgan Chase and Merrill Lynch by Bank of America), or became bank holding companies by converting their industrial loan companies ("nonbank banks") into a national (Morgan Stanley) or state chartered Federal Reserve member bank (Goldman Sachs).
At the July 13, 2004, Senate Banking Committee hearing on the GLBA's effects, the Securities Industry Association representative explained securities firms had not taken advantage of the GLBA's "financial holding company" powers because that would have required them to end affiliations with commercial firms by 2009.. GLBA critics had complained that the law had prevented insurance and securities firms from truly entering the banking business by making a "faulty" distinction between commercial and financial activities.. .