Were Banks ‘Boring’ before the Repeal of Glass-Steagall?

The presumption is before Glass Steagall repeal banks were boring and did basic stuff. Post Glass Steagall repeal in 1995, banks became adventurous and did multiple things leading to 2007 crisis.

Right?

Not so sure as per this blogpost by  of NY Fed.

So how boring have banks been in the past few decades? Let’s look at some aggregate numbers based on a database I recently assembled on the organizational structure of BHCs. Between 1970, when the data begin, and 2016, more than 13,000 unique corporations have operated at some point with a BHC charter. Of those BHCs, more than a quarter expanded their business scope beyond traditional banking, collectively adding more than 60,000 subsidiaries. These units specialized in activities spanning the financial industry, such as specialty lending, loan brokerage, securities and commodities brokerage and dealing, wealth management, insurance, and much more. 

Was it the partial repeal of the Glass-Steagall Act in 1999 that spurred this expansion? The chart below shows the number of unique financial activities that BHCs collectively engaged in each year. The data indicate that the trend toward expanded activities in fact began in the early 1980s, and continued unmitigated throughout the 1990s. Judging from this evidence, the restrictions under Glass-Steagall did not prevent BHCs from expanding beyond traditional (“boring”) activities by BHCs, nor did its repeal accelerate that expansion. 

Were Banks ‘Boring’ before the Repeal of Glass-Steagall?

Were Financial Holding Companies Expanding? 
Perhaps instead of looking at BHCs as a whole, we should look specifically at BHCs that converted into financial holding companies (FHCs), the legal charter introduced by the Gramm-Leach-Bliley Act (GLBA) that allowed firms to expand more freely across a broader set of activities. FHCs may have be the ones that actually chose to expand, but their dynamics could be lost within those of the broader population. Out of 5,354 BHCs in existence at the end of 1999, 526 became FHCs between 2000 and 2001. The chart below shows how the scope of financial activities has fluctuated for those FHCs and for all other (non-converting) BHCs, relative to 1999. Somewhat contrary to expectations, it seems that FHCs and BHCs experienced virtually identical dynamics in the post-1999 years, with no upward trend detectable for either group. 

Were Banks ‘Boring’ before the Repeal of Glass-Steagall?

In sum, the repeal of Glass-Steagall in 1999 does not seem to have ignited a flurry of new activities. As I note in a recent New York Fed Staff Report(see page five), banking firms had already been widening their business scope for a long time, so it is not clear that that particular regulatory reform can be considered the catalyst of the Great Recession some ten years later, nor is it immediately obvious how reinstating restrictions per se would reduce the likelihood of a future crisis. But how is it that banks were already allowed to engage in less “traditional” activities, and what does that tell us about the nature of the banking business? To address those questions, we need to take a look at the history of banking regulation—something I will cover in a follow-up post. 

Hmm.. Looking forward to the post..

Advertisements

2 Responses to “Were Banks ‘Boring’ before the Repeal of Glass-Steagall?”

  1. Prabhu Guptara Says:

    As many people, including me, have said:

    the subversion of the Glass-Steagall Act began in the 1980s, with the rise to power in the establishment of a number of people who did not believe in the Rule of Law, but believed rather that the Law should serve those who were clever and strong-willed enough to rule society (a la Ayn Rand).

    Banks were indeed meant to be “boring”.

    It is the job of other entities to take higher risks.

    When such risks are taken with money belonging to “normal” banking and pension funds etc, that does produce higher returns in boom times.

    But it can result in loss of capital in times of bust.

    And there is no knowing the timing of exactly when a boom turns into a bust (even though most or at least many can see a bust coming).

    Loss of capital for pensioners is a much bigger problem than lower returns from “boring” or “patient” managers of capital such as banks and pension funds.

    Unfortunately, greed results in individuals and institutions taking higher risks than they should.

    It is far better to be boring than bankrupt.

    Whole economies that were committed to slow and solid growth, such as Switzerland and northern Europe, have been seduced by the Anglo-American model of “fast” boom – and bust.

    Witness the case of Iceland – a whole country which went bankrupt in 2008 for exactly this “non-boring” reason.

    Regretfully, for the present, there is no prospect of our returning to slow and steady ways.

    At least as long as Trump continues his erratic antics in the USA, from where the disease of greed and Randism sprang.

    • Amol Agrawal Says:

      Couldn’t agree more. Finance has become so much about glamour that things just go on. It is hardly the boring and hard work it used to be which played a crucial role in financing many technologies and developments around the world…2007 crisis was not just about Glass Steagall alone but this whole culture in finance which has become outright perverse over the years..

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: