2016 Postmortem
In reply to the discussion: Hillary Clinton opposes breaking up the megabanks, opposes reinstating Glass-Steagall [View all]Rilgin
(787 posts)The above poster who tried to muddy the waters on the meaning of Glass Steagall was partially right in that Glass Steagall alone might not have directly prevented the specific problems that led to the recent bank crises. Banks could conceptually make bad bets and investments and go under. Glass Steagall was not about lending standards nor did it address the fraud in loan origination. The prohibitions against using depository capital would not directly all by themselves prevent a bank from going bust. However, it might have prevented the securitization of loans and the underwriting of those securities by the banks which played a part in the crisis
Banks could still invest their own capital. However, it was not their business. Their business was the business of retail and commercial banking. As an industry, they did not accumulate capital for investment within the bank. If the bank made a profit from its lending activities it would dividend it out to the owners who would then invest in their individual names. Banks would only hold earnings for capital needs such as building a new branch. They just would not take a derivative position or other leveraged bets in the banks name because that was the implication of Glass Steagall and the whole banking regime. An insured depository bank was just a bank and could only be a bank.
Only after deregulation did the banks become so big and so speculative.
Before deregulation, Glass Steagall was not the only law in bank regulation. Banks were highly regulated by the OCC, the FDIC, and the Fed. As a whole, this kept the banking sector stable for over 50 years.