It is fair to say that no one else sees it in quite such simple terms. The final Volcker Rule, as published in the Federal Register on January 31, 2014, ran to 541 pages.72 The rule was also accompanied by an appendix providing a further, long explanatory commentary. In addition, regulatory agencies issued hundreds of pages of supplemental guidance.
The Volcker Rule can be seen as a kind of reinstatement of Glass‐Steagall, but it is an unnecessary one for two reasons. First, and as noted above, the GLBA already prevents commercial banks from underwriting and dealing in most securities — subject to a few exceptions, such as U.S. government securities. The Volcker Rule is in some ways more restrictive, since it prohibits banks from trading anything except treasuries and agencies on their own account. That rules out foreign government bonds, as well as state and local bonds. The market for those securities will likely become less liquid as a result. Nevertheless, the Volcker Rule still allows commercial banks to hedge, underwrite, and make markets so long as it is not for their own account. Second, the Volcker Rule also appears to allow BHCs and their nonbank affiliates to trade only for their customers, for the purpose of market‐making, or for their own hedging transactions. This limitation is despite the fact that only commercial banks have access to either federally insured deposits or the Federal Reserve’s discount window.
Ultimately, the Volcker Rule is both irrelevant and highly likely to prove unworkable in practice.
The tragedy is that so much time and effort has been spent missing the point. More recent analyses of the causes of the Great Depression and the effect of the 1929 stock market crash suggest that bank failures then were due to the fragile nature of the banking system at the time (itself a product of regulations prohibiting branch banking), the persistence of regional crop failures, the decline in real estate values, and a general economic depression that was badly handled by policymakers (chief among them the Federal Reserve, which let the U.S. money supply collapse by a third).73 Glass‐Steagall could not have prevented the Depression had it been in force earlier, and it did little to address its fundamental causes subsequently.
The effect of Glass-Steagall’s 1999 “repeal” has also been exaggerated. First, the restrictions contained in Glass‐Steagall were always subject to some exceptions; second, those exceptions had already been enlarged by regulatory and judicial decisions over the course of several decades, well before the GLBA was passed; and third, the GLBA only repealed some elements of Glass‐Steagall. The general prohibition on banks underwriting or dealing in securities remained intact.
In any case, the 2008 financial crisis had precious little to do with Glass‐Steagall, one way or the other. It was caused primarily by bad lending policies, which in turn led to the growth of the subprime market to an extent that neither the lawmakers nor regulatory authorities recognized at the time. The commercial banks and parent holding companies that failed — or had to be sold to other viable financial institutions — did so because underwriting standards were abandoned. Yes, these banks acquired and held large amounts of mortgage‐backed securities, which pooled subprime and other poor quality loans. But even under Glass‐Steagall, banks were allowed to buy and sell MBS because these were simply regarded as loans in a securitized form.
Yet by focusing the public’s anger on “greed,” “overpaid bankers,” and so‐called “casino banking,” politicians have been able to divert attention from the ultimate cause of the financial crisis, namely their belief that affordable housing can be provided by encouraging — or even obliging — banks to advance mortgages to homebuyers with low to very low incomes, and requiring government‐sponsored enterprises to purchase an ever‐increasing proportion of such loans from lenders. If politicians continue to believe that affordable housing can only be provided in that way and act accordingly, no one need look any further for the causes of the next financial crisis.
1. Barack Obama, “Renewing the American Economy,” speech given at Cooper Union (March 27, 2008).
2. Elizabeth Warren’s statement in presenting S.1709 on July 7, 2015. The bill takes account of market changes by limiting the business of national banks to receiving deposits, advancing personal loans, discounting and negotiating evidences of debt, engaging in coin and bullion exchange, and investing in securities. No investment is allowed in structured or synthetic products — that is, financial instruments in which the return is calculated on the value of, or by reference to, the performance of a security, commodity, swap, or other asset, or an entity, or any index or basket composed of such items.
3. Zach Carter, “Elizabeth Warren Has Basically Had It with Paul Krugman’s Big Bank Nonsense,” Huffington Post, April 13, 2016, http://www.huffingtonpost.com/entry/elizabeth-warren-big-banks_us_570ea….
4. Robert Kuttner, “Alarming Parallels between 1929 and 2007,” testimony before the House Financial Services Committee, October 2, 2007.
5. Joseph E. Stiglitz, “Capital Fools,” Vanity Fair, January 2009, http://www.vanityfair.com/news/2009/01/stiglitz200901.
6. Andrew Ross Sorkin, “Reinstating an Old Rule Is Not a Cure for Crisis,” Dealbook, New York Times, May 21, 2012, http://dealbook.nytimes.com/2012/05/21/reinstating-an-old-rule-is-not-a….
7. Carter Glass, “Operation of the National and Federal Reserve Banking Systems,” Report to accompany S.1631, May 15, 1933, https://fraser.stlouisfed.org/scribd/?title_id=993&filepath=/docs/histo….
8. Minutes of Special Meeting of the Federal Advisory Council, Washington (March 28–29, 1932), p. 4. https://fraser.stlouisfed.org/docs/historical/nara/fac_minutes/fac_1932….
9. Ibid., p. 9,
10. “Tenth Annual Report of the Federal Reserve Board” (Washington: Government Printing Office, 1942), p. 34.
11. See, for example, Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, NJ: Princeton University Press, 1963); Lloyd W. Mints, A History of Banking Theory in Great Britain and the United States (Chicago: University of Chicago Press, 1945); and Ben S. Bernanke, “Money, Gold, and the Great Depression,” H. Parker Willis Lecture in Economic Policy, Washington and Lee University, Lexington, VA, March 2, 2004.
12. Eugene N. White, “Before the Glass‐Steagall Act: An Analysis of the Investment Banking Activities of National Banks,” Explorations in Economic History 23, no. 1 (1986): 40ff.
13. See Charles W. Calomiris, U.S. Bank Deregulation in Historical Perspective (New York: Cambridge University Press, 2000), p. 57; and Federal Reserve Bulletin 25, no. 9 (September 1939): 730.
14. See, for example, Gary Richardson, and William Troost, “Monetary Intervention Mitigated Banking Panics during the Great Depression: Quasi‐Experimental Evidence from the Federal Reserve District Border, 1929 to 1933.” Journal of Political Economy 117, no. 6 (December 2009): 1031–1073.
15. Eugene N. White, “Before the Glass‐Steagall Act: An Analysis of the Investment Banking Activities of National Banks,” Explorations in Economic History 23, no. 1 (1986): 51.
16. Ibid., p. 35.
17. See David L. Mengle, “The Case for Interstate Branch Banking,” Federal Reserve Bank of Richmond Economic Review (November/December 1990). The author relies on figures from U.S. Department of the Treasury, Geographical Restrictions on Commercial Banking in the United States (Washington: Government Printing Office, 1981); as well as Banking Expansion Reporter, August 6, 1990.
18. Charles W. Calomiris and Stephen H. Haber, “Interest Groups and the Glass‐Steagall Act,” CESifo DICE Report 11, no. 4 (Winter 2013): 16.
19. R. Alton Gilbert, “Requiem for Regulation Q: What It Did and Why It Passed Away,” Federal Reserve Bank of St. LouisReview (February 1986): 34.
20. The OCC’s Regulation 9 applies to national banks and allows them to open and operate trust departments in‐house, to function as fiduciaries, and to manage and administer investment‐related activities, such as registering stocks, bonds, and other securities.
21. Investment Co. Inst. v. Camp, 401 U.S. 617, 626–27 (1971).
22. Ibid., p. 682.
23. See ibid., p. 631.
24. Securities Activities of Commercial Banks: Hearingsbefore the Subcommittee on Securities of the Senate Committee on Banking, Housing, and Urban Affairs, 94th Cong. 193 (1975).
25. The Federal Reserve Board’s Regulation Y applies to the corporate practices of BHCs and, to a certain extent, state‐member banks. The regulation sets out the transactions for which a BHC must seek the Federal Reserve’s approval.
26. Bank Holding Companies and Change in Bank Control (Regulation Y), 12 C.F.R. 225 (1977).
27. Office of the Comptroller of Currency (OCC) Interpretive Letter no. 494, December 20, 1989 (reprinted in 1989–1990 Transfer Binder).
28. OCC Interpretive Letter No. 684, August 4, 1995 (reprinted in 1995–1996 Transfer Binder).
29. “Matched Swaps Letter,” OCC No‐Objection Letter No. 87–5, July 20, 1987, (reprinted in 1988–1989 Transfer Binder).
30. OCC No‐Objection Letter No. 90–1, February 16, 1990 (reprinted in 1989–1990 Transfer Binder).
31. OCC Interpretive Letter No. 652, September 13, 1994 (reprinted in 1994 Transfer Binder).
32. OCC Interpretive Letter No. 652, September 13, 1994 (reprinted in 1994 Transfer Binder), n. 124.
33. It should be noted that although the OCC’s various letters placed little emphasis on the complex risks involved in derivatives, those risks were spelled out more fully in the 1997 Derivatives Handbook . This document was for the use of the OCC’s own bank examiners, and alerted them to the variety and complexity of risks associated with derivative transactions.
34. OCC Interpretive Letter No. 380, December 29, 1986 (reprinted in 1988–1989 Transfer Binder).
35. OCC Interpretive Letter No. 577, April 6, 1992 (reprinted in 1991–1992 Transfer Binder).
36. OCC Interpretive Letter No. 386, June 19, 1987 (reprinted in 1988–1989 Transfer Binder).
37. Investment CompanyInstitute v. Clarke, 630 F. Supp 593 (D. Conn. 1986).
38. Federal Reserve Bulletin 73, no. 2 (February 1987): 148, fn. 43.
39. OCC Interpretive Letter No. 380, December 29, 1986 (reprinted in 1988–1989 Transfer Binder).
40. “Eligibility of Securities for Purchase, Dealing in Underwriting and Holding by National Banks: Rulings Issued by the Comptroller,” 47 Federal Register 18323 (April 29, 1982).
41. Federal Reserve Bulletin 64, no. 3 (March 1978): 222 (reference to the Federal Reserve’s proposed rulemaking, as published in 43 Federal Register 5382 [February 8, 1978]).
42. Securities Industry Association v. Board of Governors, 839 F.2d 51 (2nd Cir. 1988), citing Federal Reserve Bulletin 73, no. 6: 485–86 (June 1987).
43. 61 Federal Register 68750 (December 30, 1996).
44. Ibid., pp. 68750–755.
45. “Revenue Limit on Bank‐Ineligible Activities of Subsidiaries of Bank Holding Companies Engaged in Underwriting and Dealing in Securities,” Federal Reserve System Docket no. R-0841.
47. Section 20 reads as follows: “No member bank shall be affiliated in any manner … with any corporation, association, business, trust or similar organization engaged principally in the issue, flotation, underwriting, public sale or distribution at wholesale or at retail or through syndicate participation in stocks, bonds or debentures, notes or other securities.”
48. Section 32 states that “no officer or director of any member bank shall be an officer, director or manager of any corporation, partnership, or unincorporated association engaged primarily in the business of purchasing, selling or negotiating securities and no member bank shall perform the functions of a correspondent bank on behalf of any such individual, partnership, corporation or unincorporated association and no such individual, partnership, corporation, or unincorporated association shall perform the functions or a correspondent for any member bank or hold on deposit any funds on behalf of any member bank.”
49. The Bank Holding Act of 1956 allowed BHCs to engage directly in, establish, or acquire subsidiaries that engage in nonbanking activities deemed by the Federal Reserve to be “closely related” to banking, such as mortgage banking, consumer and commercial finance, leasing, real estate appraisal, and management consulting.
50. It would be difficult for any director, senior manager or employee of the bank to breach these restrictions. The penalties under 12. U.S.C. § 1818 are onerous and apply to any Institute Affiliated Part (IAP), as well as independent contractors such as attorneys. The civil money fines are heavy (a maximum of $1million per day while the violation continues); other penalties include temporary or permanent prohibition on participation in the industry. It is, however, difficult to find any instance when such penalties have been imposed.
51. Section 16 states that