Glass-Steagall Act

The Glass-Steagall Act is a piece of legislation which was created in the year 1933. Its main feature is that it disallows banks from engaging in business activities which are not considered financial in nature. These non-financial activities are mainly in connection with investments and corporate stocks. Entering into the business of stocks and bonds is considered quite risky, especially in comparison with regular banking activities. In fact, the push for this legislation was a result of a crash in the stock market, in which banks seemed to have played a part. As such, the Act was put in place to prevent banks from engaging in potentially precarious activities.

Otherwise known as the Banking Act of 1933, the Glass-Steagall Act established a scheme in which banks were classified as either commercial banks or investment banks. At the same time, it also created the Federal Deposit Insurance Corporation, or the FDIC. The FDIC was put in charge of insuring deposits in commercial banks. This gave banking clients the added security of knowing that they would not lose all of their money in case their bank collapsed, which had already happened during the Great Depression. Of course, since investment banks carried much greater risks with them, the same insurance was not afforded them by the FDIC.

Several decades later, however, the Glass-Steagall Act was repealed. This was actually the result of the introduction of two separate Acts, the Depository Institutions Deregulation and Monetary Control Act and the Gramm-Leach-Bliley Act. The repeal, however, seems to have contributed to major difficulties during the more recent financial crisis, particularly in 2009.