Why no glass steagall in europe

Universal banks were at the center of major financial crises that erupted in the U. The Glass-Steagall Act together with other New Deal legislation established a decentralized financial system composed of separate and independent sectors.

Commercial banks accepted deposits, extended loans, and provided fiduciary services including wealth management and investment advice to consumers and businesses. Securities firms attracted longer-term funding commitments from investors and arranged medium-term and longer-term financing for businesses.

Insurance companies collected premiums from consumers and businesses and provided medium-term and longer-term coverage for various types of risks. During that period, no major financial crisis occurred. Regulators could address financial problems with targeted responses that did not require massive bailouts of the entire financial system.

Federal courts at first defended Glass-Steagall, as they struck down several attempts by large banks and federal regulators to open loopholes in the statute from the late s through the early s. The post-New Deal system of financial regulation experienced a series of economic shocks and legal challenges after The economic shocks included the collapse of the Bretton Woods system of fixed exchange rates for international currencies as well as high inflation rates that rose steadily during the s and peaked in Regulation Q prohibited banks from paying interest on demand deposits and limited the interest rates that banks could pay on savings accounts and certificates of deposit.

Regulation Q was intended to restrain deposit-rate competition among banks and thereby discourage the excessive risk-taking that banks exhibited during the s. Some scholars have argued that the collapse of Bretton Woods and the high inflation rates of the s destroyed the economic foundations of Glass-Steagall. Professor Paul Mahoney has provided a detailed account of that position in a recent article. MMMFs, short-term commercial paper, and short-term repos allowed securities firms to offer bank-like products to consumers and businesses.

Securitization and OTC derivatives permitted banks to offer financial services that competed directly with securities firms and insurance companies. I agree with Professor Mahoney that economic trends and financial innovations posed serious threats to the viability of Glass-Steagall.

I contend that industry participants exploited market forces by mounting attacks on Glass-Steagall, and federal agencies and courts helped them to do so. However, the Fed never did so. The Justice Department and the SEC ignored the fact that MMMFs competed directly with bank deposit accounts and provided the functional equivalent of checking accounts.

The rapid expansion of MMMFs and the corresponding outflow of deposits from banks provided a convenient rationale for Congress to repeal Regulation Q — a result that federal regulators and many bankers welcomed.

MMMFs continued to grow because they enjoyed important cost advantages over banks. MMMFs did not have to pay deposit insurance premiums or maintain capital buffers similar to those required for banks. As MMMFs grew, so did the market for commercial paper, a short-term debt instrument usually with maturities of 90 days or less issued by nonfinancial corporations and financial firms.

MMMFs were the largest investors in commercial paper. MMMFs were also the most important cash lenders for repos. The Glass-Steagall Act was a U. It was swept aside in , permitting companies to mix banking with other activities, a step some policymakers blame for helping to sow the seeds of the credit crunch.

Britain unveils plans to tighten the leash on banks next week to make the sector safer for investors and apply lessons from the credit crunch. Learn more and compare subscriptions content expands above. Full Terms and Conditions apply to all Subscriptions. Or, if you are already a subscriber Sign in. Other options. Close drawer menu Financial Times International Edition. Search the FT Search. However, the Nazis made industrial planning a top priority. Rearmament of the country required huge amounts of capital.

So banks were to play a key role in the economic policy of the Third Reich. But they were still recovering from the hyperinflation of the interwar, followed by the crash. The financial industry was in poor shape. Instead of splitting large yet fragile banks, which was the initial plan, Nazi authorities decided to use them to place government bonds and finance the state. Several times in the s, when banks were unable to find buyers for bonds because of the growing isolation of the German financial market from the rest of the world, major banks were forced to buy the bonds themselves.

The Nazis rapidly realized that they could use the banks to their own advantage. Among those historians was Professor Harold James. The book demonstrated that major banks had also preserved their political power by participating in the expropriation of the Jews.

It started with the dismissal of Jewish directors, and it went as far in details as reducing the pensions of retired Jewish employees. Banks are very powerful political actors. Major reforms can only be enacted in specific periods, when political momentum provides windows of opportunity. In the s, Europe could not use the momentum of the crisis, because it was entangled in much more dramatic political issues.