Think back to America History class. Do you remember learning about the Glass-Steagall Act? The law dates back to the Great Depression and enforced a strict separation between banks that take deposits and those that invest in capital markets – that is until it was repealed in 1999.
Ironically, former Citigroup chairman Sanford “Sandy” Weill, who was the architect behind the 1998 merger of Citigroup and Travelers Group (which also owned the investment firm Salomon Smith Barney at the time) that resulted in the repeal of Glass-Steagall recently suggested adopting a new two-tiered banking model. Weill would split banks into the traditional deposit takers who could make loans and more “creative” institutions that could take more risk. In a recent interview, he urged, “Let’s have a creative banking system, like we always had, where the financial industry can again attract the best and the brightest young people like they do in Silicon Valley, so that we can lead innovation that is necessary and [encourage] the entrepreneurship that’s necessary. We can’t have a world where it is impossible to make a mistake.”
Allowing bankers to makes mistakes will be a tough sell in the wake of the recent financial crisis, and with the recent London Whale trades and Libor scandal now playing out. While Weill’s unlikely to garner much support to allow bankers to operate in a more risky fashion, the question of just how commercial banking and investment banking should be regulated will persist.
In an article in Knowledge@Wharton, Wharton management professor Mauro Guillén expressed his preference for central regulation for the big banks, noting, “When a bank is in 10 kinds of financial services, it does not need more regulation; it needs one regulator.” He says the Dodd-Frank Wall Street Reform and Consumer Protection Act “hands more powers to the Fed, the Treasury and other agencies with authority over systemically important financial institutions. But owing to political pushback, none have full powers.”
Let’s hope that financial regulation and reform stay at the forefront of Washington’s agenda because, as Guillén wisely notes, “Untrustworthy banks are the last thing that’s needed if we are to overcome this crisis.”