Thursday, July 09, 2015

Sen. Warren Bill Sees Future in Glass-Steagall’s Past

By Mark S. Nelson, J.D.

Senator Elizabeth Warren (D-Mass) will introduce a bill that would restore some of the banking limits once enshrined in the Great Depression-era Glass-Steagall Act. She is joined in this effort by co-sponsors John McCain (R-Ariz), Angus S. King, Jr. (I-Me), and Maria Cantwell (D-Wash). The senators believe recent financial reforms did not go far enough to cut the risks posed by the biggest banks, so they are offering a bill that mirrors one they introduced in the 113th Congress to further curb banks’ riskiest activities, said a press release.

A modern Glass-Steagall framework. Banks would have a five-year period under Sen. Warren’s bill to transition into smaller versions of themselves, in which they must separate their deposit taking business from the riskier product offerings they created in the decades since the Glass-Steagall Act became law, was eroded by regulators, and then repealed. The bill also would impose penalties for violations of the banking laws targeted by Sen. Warren, noted a fact sheet.

"The biggest banks are collectively much larger than they were before the crisis, and they continue to engage in dangerous practices that could once again crash our economy,” said Sen. Warren. “The 21st Century Glass-Steagall Act will rebuild the wall between commercial and investment banking and make our financial system more stable and secure.” Senators McCain and Cantwell echoed these sentiments.

How the bill works. According to the bill’s safety and soundness provision, no federally insured depository institution may be an affiliate of, or be in common ownership or control with, or qualify as, an insurance company, securities entity, or swaps entity. Existing affiliate relationships that run afoul of the bill would have to end within five years of enactment, unless terminated early or granted a six month extension. Federal banking regulators could, after a hearing, order the early termination of these relationships when necessary in the public interest to prevent undue resource concentration or other anticompetitive or unsound banking practices.

Moreover, persons who are officers, directors, or employees of insurance companies, securities entities, or swaps entities, or another institution-affiliated party may not simultaneously hold these posts at an insured depository institution. An exception would exist if federal banking regulators determined that a person serving in these roles at both types of institutions would not unduly influence the depository institution’s investment policies or the advice that institution gives to its customers. Officers and directors required to terminate their roles at affiliated firms must do so as soon as practicable once Sen. Warren’s bill becomes law, but not later than 60 days after enactment.

“Securities entity” would mean any entity engaged in the issuance or distribution of securities, market making, broker-dealer activities, futures commission merchant activities, playing the role of investment adviser or taking part in investment company activities, or making hedge fund or private equity investments. But the term would not apply to a bank that is engaged in authorized trust and fiduciary activities.

The bill also would define “swaps entity” to include any swap dealer, major swap participant, security-based swap dealer, or major security-based swap participant, as described in the Commodity Exchange Act or the Exchange Act.

Senator Warren’s bill would update federal banking laws to clarify the activities permitted to national banks and federal savings associations. The bill further revises the Bank Holding Company Act to clarify the activities prohibited to bank holding companies. Under the holding company amendments, the executives of a bank holding company or its affiliate must attest in writing that their institutions are in compliance with activities ban.

Lastly, the bill would formally repeal specified Gramm-Leach-Bliley Act provisions and some provisions in the federal bankruptcy laws. The bill also would make numerous technical and conforming amendments to the banking laws.