Since the financial crisis of the last decade and what has become known as the “Great Recession”, there has been much debate and finger pointing in terms of the underlying cause and what could have been done differently. Some of it is myth, mystery, and urban legend as speculation continues to attempt to pinpoint the cause.
One popular theory is that much of the problems stemmed from the deregulation of banks that took place in 1999 with the repeal of parts of the Glass-Steagall Act through the passage of the Gramm-Leach-Bliley Act. This change made it possible for banks to expand into non-bank activities such as insurance and securities. The idea is this has created instability and contributed to the financial crisis.
A new study by economist Nicola Cetorelli with the Federal Reserve Bank of New York, however, contradicts this. The data shows that banks, via the Bank Holding Company organizational structure, had ventured into these activities prior to 1999 and, that in fact, by that time the expansion into those activities had essentially peaked.
Cetorelli concludes as follows:
In sum, the repeal of Glass-Steagall in 1999 does not seem to have ignited a flurry of new activities…banking firms had already been widening their business scope for a long time, so it is not clear that that particular regulatory reform can be considered the catalyst of the Great Recession some ten years later, nor is it immediately obvious how reinstating restrictions per se would reduce the likelihood of a future crisis.
The data shows that bank holding companies had expanded into non-traditional activities long before the legislative change as evidenced by the growth in subsidiaries owned by banks as well as non-interest income. The full article can be accessed below.
Nicola Cetorelli, “Were Banks ‘Boring’ before the Repeal of Glass-Steagall?” Federal Reserve Bank of New York Liberty Street Economics (blog), July 31, 2017, http://libertystreeteconomics.newyorkfed.org/2017/07/were-banks-boring-before-the-repeal-of-glass-steagall.html.