The banking industry 1999 – 2011
Strategic Management
The banking industry has been through several periods of regulation and deregulation.
Over the past 20 years, there has been plenty of legislation passed, reformed and
reinstated.
The Glass-Steagall Act of 1933 was passed in reaction to the 1929 stock market crash.
This act ushered in an era of more stringent banking regulation by creating separation
between commercial banks, which take deposits and make loans, and investment banks,
which organize the sale of stocks and bonds. It was believed that banks were taking too
much risk with the depositor funds. The act, officially known as the Banking Act of 1933,
established the concept of deposit insurance and set up the Federal Deposit Insurance
Corporation (FDIC) to provide it. Before the crash of 1929, commercial banks were
investing in extremely risky ventures as well as issuing unsound loans to those same
companies they had invested in. The banks encouraged its clients to follow a similar
investment philosophy. The Glass-Steagall act further prohibited banks from having more
than 10% of total income come from investments. This cut out a huge portion of the
financial giants’ source of income.
The main goal of the Glass-Steagall act was achieved by maintained levels of integrity and
stability in the American banking system. The financial panics that were commonplace
throughout the years before the act was passed were no longer a regular occurrence.
Although there were some individual bank failures on occasion, trust in the U.S. financial
system had grown because of newfound transparency and reliability. Congress built on this
success and passed the Bank Holding Act of 1956. This act separated banks and insurance
companies even farther. Banks were allowed to sell insurance but were no longer allowed
to underwrite it.
Then in 1999, the Glass-Steagall act was on the brink of being repealed. There was
a spirited debate on how much regulation was good for the industry. Dissenters of the
repeal argued that deregulation of Wall Street would wreak havoc on the nation’s financial
system. The separation between bankers and brokers reduced the potential conflicts of
interests that were thought to have contributed to the speculative stock frenzy before the
Depression.[1] One of the few dissenting opinions was held by Senator Byron L. Dorgan,
Democrat of North Dakota. Dorgan stated, “I think we will look back in 10 years’ time and
say we should not have done this but we did because we forgot the lessons of the past, and
