I realize that the part of the reason the Glass-Steagall act was enacted was to ensure that banks do not invest customer's deposits into risky securities, but what was the rationale for separating investing banking from consumer banking? What did they hope to achieve by doing this?

  • 1
    $\begingroup$ Not just risky securities. A bank often has a brokerage arm that tries to make commissions and profit off spreads. This is in direct conflict with clients ( who are, for example, investing in some strategy that the bank runs ) interests. So, if you have the two functions in the same bank, there's more of a chance this conflict of interest being exploited. Although, I'm not so sure if it still doesn't go on. How can these organizations ( such as the SEC, or whomever else ) really know what goes on internally ? $\endgroup$
    – mark leeds
    Aug 4 '19 at 20:40
  • 1
    $\begingroup$ It isn't clear that laws generally have a "point". People have complex motives for supporting bills, and they may even be contradictory. For example, fictitiously, Joe supported Glass-Steagall to control bank risks. Harry supported it to prevent a more restrictive bill from becoming law. Fred's gave his support in exchange for keeping a base open in his district. Jane supported it because of a personal vendetta with a banker. Sarah opposed it hoping for something more restrictive while Sam did it for the campaign donation. In this situation, there is no "why" Glass-Steagall was enacted. $\endgroup$
    – BKay
    Aug 5 '19 at 16:36
  • $\begingroup$ Bkay is correct. I should have said that my description was what "they" claimed the bill was for. Why it actually passed could be for any reason.. Mr. X voted for it because Mr. Y, the little league coach, allowed the son of Mr.X be the starting pitcher in last week's little league game. So Mr. X owed him one. $\endgroup$
    – mark leeds
    Aug 6 '19 at 5:35
  • $\begingroup$ Appreciate the answers, however, my question was more aimed at what the objective motivation behind this law was. Yes, it is true that the law could have been passed due to a bunch of arbitrary reasons, but what was the supposed benefit of separating these two branches of banking, objectively speaking? $\endgroup$
    – lithium123
    Aug 7 '19 at 18:26
  • 1
    $\begingroup$ @lithium123:Below is a discussion of it. Notice that it says that it prevents banks from borrowing excessively from themselves. This then limits the amount of prop trading that can be done by the banks because prop trading often depends on large amounts of leverage. Limiting prop-trading then limits the risk of the bank losing a ot of money and also limits the conflict of interest that I talked about earlier. thebalance.com/… $\endgroup$
    – mark leeds
    Aug 8 '19 at 3:01

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.