A comparative analysis of the US and EU retail banking markets - Wsbi

This blurring of roles is considered by some as one
of the causes of the crash of 1929. Against this
background, the Banking Act of 1933, also referred
to as the Glass-Steagall Act, imposed a separation of
ownership of commercial and investment banking
firms (and prohibited them to merge) and barred
banks from underwriting or even dealing in corporate
securities. Because of this division, banks and
investment firms did not compete with each other.
Some market participants took measures to avoid the
separation between the commercial and investment
bank activities, notably by creating bank holding
companies which hold both a commercial and an
investment bank. The Bank Holding Company Act of
1956 was also a policy response to this tendency,
seeking to maintain the division between the
different activities.
Most restrictions of the Glass-Steagall Act have been
lifted with the “Financial Modernisation Act” of
1999, also known as the Gramm-Leach-Bliley Act 183 .
Specifically, in the first title of the Act (“Title I –
Facilitating affiliation among banks, securities firms,
and insurance companies”), the following important
measures are included:
- repeal of some of the restrictions on banks
affiliating with securities firms contained in the
Glass-Steagall Act;
- creation of a new “financial holding company”,
which can engage in a statutorily provided list of
financial activities, including insurance and
securities underwriting and agency activities as
well as merchant banking and insurance company
portfolio investment activities;
- lifting of some of the restrictions governing nonbank
banks.
4.2.5.1.1.2 The savings and loans crisis: an example
of deregulation followed by re-regulation
The savings and loans crisis (“S&L crisis”) provides
us with an example of deregulation, which has led
to a crisis and subsequently resulted in a new phase
of regulation.
Until the end of the 1970’s, the savings and loans were
strictly limited in the activities they were allowed to
perform, notably accepting deposits and granting long
term fixed rate home mortgage loans. The regulation
of savings and loans also included a ceiling on the
interest rates they could offer to depositors.
At the end of the 1970’s / beginning of the 1980’s,
a series of measures were taken to lift the regulation
applicable to savings and loans. These new provisions
allowed them for instance to expand the activities in
which they could engage (e.g. make commercial
loans, issue credit cards) and to pay higher rates for
their deposits. Deregulatory measures included the
Depository Institutions Deregulation and Monetary
Control Act of 1980 and, most importantly, the Garn
– St Germain Depository Institutions Act of 1982.
However, the deregulation of the thrift industry has
not been accompanied by a parallel increase in
examination resources.
A combination of several factors caused serious
problems to the thrift industry, resulting in the failure
of hundreds of individual institutions. Deregulation
was often mentioned as a key reason for the
problems of the industry, as it made it possible for
these institutions to engage in more risky activities.
Savings and loans institutions were also highly
vulnerable to the strong interest rate volatility
experienced at the beginning of the 1980’s, as often
they had to pay higher interest rates on deposits but
were locked into their credit engagements by lower
long term fixed interest rates.
A bailout plan was finally adopted in August 1989,
the Financial Institutions Reform Recovery and
Enforcement Act (FIRREA). The plan included
important provisions, such as the abolishment of the
Federal Home Loan Bank Board and of the Federal
Savings and Loan Insurance Corporation (FSLIC) and
the creation of the Office of Thrift Supervision, newly
responsible for the supervision of S&L regulation.
Other measures included the shift of the deposit
insurance function to the FDIC and the creation of a
new entity, the Resolution Trust Corporation, to
resolve the insolvent S&Ls.
In a study published in December 2000 184 , the FDIC
estimated that the combined total for all direct and
indirect losses was an estimated USD 152.9 billion,
of which US taxpayer losses amounted to USD 123.8
billion and the thrift industry losses amounted to
USD 29.1 billion.
183 Information on the Gramm-Leach-Bliley Act can be obtained on the website of the US Senate at the address http://banking.senate.gov/conf/.
184 FDIC Banking Review - 2000 - Vol. 13 No. 2. Article available from: http://www.fdic.gov/bank/analytical/banking/2000dec/brv13n2_2.pdf.
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