Glass Steagall becomes more relevant every day as we hear and read about the downturn in the economy!
As America is the most powerful nation in the Western world it would be foolish to think their lack of, or state of economic prosperity will not affect us. So what are they doing to secure a sound economy? We are posting some extracts from an article written by Eleanor Bloxham (Mar 21, 2017) for your information.
Will Donald Trump Keep His Campaign Promise To Reinstate Glass-Steagall?
During a press briefing earlier this month, White House Spokesman Sean Spicer said the administration remained committed to a Trump campaign promise to restore Glass-Steagall, which effectively prohibits commercial banks from engaging in investment banking. The law was created in 1933, but most of it was rescinded in 1999(Clinton administration). However unreliable Spicer has shown himself to be, bringing back the law would be a welcome move for anyone hoping to get tough on Wall Street’s continuing risks.
Glass-Steagall was put in place after the Depression to ward off the economic wreckage of financial crises by requiring that banks either be a regular bank that takes in customer deposits or an investment bank that makes markets in securities. Bank regulators’ failure to enforce the law aided its demise, and Congress repealed the requirement for separation of the two types of banks during the Clinton Administration under the Gramm-Leach-Bliley bill.
Arthur Levitt, who ran the SEC at the time, told Front-line that pressures from the White House, the Federal Reserve and many lobbyists from the financial services industry, including a big push from the derivatives lobby, led to the reversal. ……
That Glass-Steagall has not yet been reinstated speaks to the power of the financial services industry and the misguided faith in humans to self-regulate on matters conflicting with their immediate self-interest. Whether or not the Trump administration takes action, a bipartisan group of 26 members of Congress in February called for a return to Glass Steagall….
Glass-Steagall is not sufficient to prevent future crises, but it is necessary. It’s impossible for managers and boards to do their jobs effectively in overseeing banks with both investment and regular banking under the same roof, each with such distinct risk appetites, divergent cultures and differing stakeholder expectations…….
Restoring Glass-Steagall is relatively straightforward, while other alternatives like going to shareholders — bank by bank — to force separation are much more time consuming and tedious. …….
Glass-Steagall is also more effective than structures that might mimic it. During my talk last week with …. the Federal Deposit Insurance Corporation (FDIC) vice chair told me that he also has seen how the risky culture of investment banking overran the relationship culture of regular banking after Glass-Steagall. And he continues to be concerned that the largest, riskiest banks could again take down the economic system, leaving taxpayers to clean up the mess. But unsure that Congress will pass Glass-Steagall, he’s suggested a complex alternative, which would not break the largest banks in two, but would call for the bank holding company (with its existing board and stock) to create two separate businesses (a commercial bank and an investment bank), each with separate stock and separate boards. ….. To its detriment, however, the plan relies on markets to effectively monitor the new individual stocks with no promise of shareholder voting rights….
Glass-Steagall’s reinstatement is … important because it makes it easier to comply with existing requirements and other needed banking reforms …….
With Glass-Steagall, we could expect better living wills and stress tests, as the entities would be separate and less complex…….. Implementing capital increases and addressing the key ongoing concerns of derivatives would also be easier to implement.
Of course, reinstating Glass-Steagall is bound to elicit cries of victimization from financial institution CEOs and their lobbyists. But that’s to be expected.
Rise Up Australia Party Supports the Glass Steagall banking act of 1933 and would like to include some extracts from a well written article on ……..
Why Australia urgently needs a Glass-Steagall banking separation
By Robert Barwick
The U.S. Congress is now considering a bill, House Resolution 129, to re-enact the Glass-Steagall Act 1933, which split commercial banks that hold deposits off from risky investment banks. The Glass-Steagall Act protected America’s depositors until its repeal in 1999 led directly to the Wall Street megabanks, their reckless gambling losses that caused the global financial crisis, and the trillions of dollars in government and central bank bailouts.
Politicians in Italy, Iceland, Belgium, Sweden and Switzerland are working on Glass-Steagall laws; and more than 60 per cent of British MPs support a full-scale Glass-Steagall-style separation for the U.K..
Australian politicians must recognise that the financial danger their international counterparts are acting to avert is a global threat from which Australia is not immune, and move urgently to enact a Glass-Steagall separation for the Australian financial system. …….. Four major banks—CBA, ANZ, NAB and Westpac—dominate Australia’s financial system. The same banks dominate New Zealand. The IMF noted with concern in November 2012 that the level to which the domestic financial system is concentrated in these four banks, which between them hold 80 per cent of Australian residents’ assets, makes them systemic—a crisis in these banks is a crisis for the entire system.
The big four banks are each conglomerates, combining the traditional banking of deposits and loans with the riskier financial activities of investment banking, funds management, stockbroking, and insurance. This structure is precisely what the architects of the Glass-Steagall Act recognised posed such a risk to the security of depositors.
There is an assumption that the big four won’t get into crisis, as they are the strongest banks in the world. This is the same assumption that every nation presently in financial crisis held about their own banks when they were riding high. Not only was it proved wrong for those nations, it has already been proven wrong for Australia. The supposedly “sound” Australian banks almost went bankrupt when the GFC erupted in Sep.-Oct. 2008, unable to repay their enormous foreign debts, and had to beg the Rudd government to go guarantor for new foreign borrowings to roll over their existing loans …….. From its recent analysis of the Australian financial system, the IMF expressed concern that Australia’s banks have only six per cent capital. This enables the banks to rack up bigger profits, but it leaves them extremely vulnerable—just a six per cent decline in the value of their assets will wipe them out.
Adding to the structural vulnerability, the four banks are very similar businesses:
- They are each heavily exposed to the inflated domestic property market, which accounts for more than 50 per cent of their lending. A property market decline in Australia ……would be enough to collapse all four banks.
- Each bank is dangerously exposed to toxic derivatives contracts, with a notional value many times their assets. The Reserve Bank reports total derivatives exposure for all Australian banks is a fraction short of $20 trillion; total bank assets by comparison are $2.85 trillion. This exposure is kept “off-balance sheet”. ………
- The four banks are also heavily reliant on foreign loans. More than half, $802 billion as of Sep. 2012, of Australia’s gross foreign debt is owed by banks, the majority of that by the big four. $513 billion is short-term debt, ……It is this short-term debt which virtually bankrupted them in 2008.
Australians call for Glass-Steagall
A number of Australians with intimate knowledge of the Australian financial system have called for Glass-Steagall. The most prominent is former NAB CEO and BHP Chairman Don Argus. Argus told the 17 Sep. 2011 The Australian “……What has to be done is to separate commercial banking from investment banking. I challenge any commercial bank board to really understand investment banking risk. ……..”
The 6 Aug. 2012 Australian Financial Review reported an unnamed “retired senior local banker” who was raising “concerns about the potential for a local bank to get into strife”. Under the headline “Big four might make a better eight”, the AFR revealed that their source, careful to remain anonymous due to his present position, echoed Wall Street banker Sandy Weill’s call for Glass-Steagall: “Australia’s banks were too big and complex and should be broken up”.
Background: ….. Australia has never had a Glass-Steagall-style banking separation, but the domestic banking system was not always exposed to the level of risk as it is today.
To Read the rest of this article go to: http://www.cecaust.com.au/policy/glass-steagall/whyaustralianeeds.html
Rise Up Australia Party’s Policy is: to guarantee that banking serves the national interests of the Australian people, being conducted under the direction of the Parliament ………… and that citizens’ personal deposits are protected by requiring that investment banking is kept separate from commercial banking as in the Glass-Steagall Act of the USA; The Banking Act of 1933. We must have a banking system that will enable family business, small and large manufacturers and home owners to feel secure having confidence that their investment and hard work will not be put at risk by bankers investing in each other’s high risk schemes.
Our Policy to bring in legislation to break up banking corporations into safer deposit taking banks regulated by a separate government endorsed body and guaranteed by the Federal Government. In this way, commercial/business/private/and the individual’s banking will be completely separated from riskier parts of the financial system —investment banking, stockbroking and insurance.
Read our economic policy, Part 3, for more information on this topic. www.riseupaustraliaparty.com