University of Houston Finance Professor Craig Pirrong characterized bipartisan advocates who would restore the Glass-Steagall Act (“Glass-Steagall”) in order to prevent future crises as “wholly misguided.”
Professor Pirrong identified the imposed separation between securities underwriting and commercial banking as the “part of the Glass-Steagall Act which its worshipers are most intent on restoring.” He argued that the banking structures outlawed by Glass-Steagall were not “materially important in causing the 2008 crisis,” noting that institutions responsible for nearly bringing down the financial system were mostly standalone investment banks and not depository institutions. Professor Pirrong stated that reimposition of a Glass-Steagall law would be potentially destructive:
Glass-Steagall restrictions are largely irrelevant to preventing financial crises, and some of their effects – notably, the creation of an investment banking industry largely reliant on hot, short-term money for funding – actually make crises more likely.
Lofchie Comment: The restoration of Glass-Steagall is a financial regulatory “reform” having a political moment. Most people seem to approve of it without knowing what it means or why it could be beneficial. The strangest premise of Glass-Steagall is the idea that commercial banking must be separated from investment banking in order to protect the banking business. In reality, the business of making commercial loans on collateral that is either illiquid or nonexistent seems far riskier than the business of securities underwriting. See CATO Institute Director Mark Calabra’s report, “Did Deregulation Cause the Financial Crisis?“