Question

3. Discuss main provisions of Glass-Steagall Act of 1933. When was it overturned and what was were effects of its repeal?

4. Discuss costs and benefits of too-big-to-fail policy.

Answer 1

3.Main Provisions of Glass Steal Act 1933

• The Glass-Steagall Act was passed by the U.S. Congress as part of the Banking Act of 1933. Sponsored by Senator Carter Glass, a former Treasury secretary, and Representative Henry Steagall, chairman of the House Banking and Currency Committee.
• It was formed to stop the unprecedented run on banks and restore public confidence in the U.S. banking system.
• Also it served as  the linkages between banking and investing activities that were believed to have caused the 1929 market crash, and the ensuing depression.
• The Glass-Steagall Act created the Federal Deposit Insurance Corporation (FDIC), which guaranteed bank deposits up to a specified limit.
• The act also established the Federal Open Market Committee (FOMC) and introduced Regulation Q, which prohibited banks from paying interest on demand deposits and capped interest rates on other deposit products.

The Glass-Steagall Act was largely repealed in 1999 by the Graham-Leach-Bliley Act (GLBA), allowing commercial banks to engage in investment banking and securities trading.

Effects of Repeal :

• Repealing the Glass-Steagall Act, which effectively let banks become even larger, could be considered a factor of the 2008 financial crisis.
• It is one of the minor factor that caused 2008 financial crisis. Unscrupulous lending practices were a much larger contributor.

4.Too big a policy to fail is based on the idea that some financial institutions are so large that government officials cannot allow them to fail because their failure will put the entire financial system at risk. The benefit of too big a policy to fail is that it makes bank panics less likely, however, the costs is that it increases the incentive for moral hazard by big banks who know that depositors do not have incentives to monitor the banks’ risk-taking activities. In addition, it is an unfair policy because it discriminates against small banks.