Regulation of State Nonmember Insured Banks' Securities Activities: A Model for the Repeal of Glass-Steagall
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REGULATION OF STATE NONMEMBER
INSURED BANKS' SECURITIES ACTIVITIES:
A MODEL FOR THE REPEAL OF
GLASS-STEAGALL?
PETER B. SABA*
In the midst of the Great Depression Congress enacted the Glass-
Steagall Act to separate the investment and commercial banking indus-
tries. This measure was a response to the perceived abuses by commercial
banks and their securities affiliates which were seen as being associated
with the stock market collapse and bank failures of that era.
As enacted, the Glass-Steagall Act included a number of inconsistencies
and loopholes. Mr. Saba argues that since the passage of the Act, these
loopholes, combined with market forces and technological advances, il-
lustrate that the Act is little more than an economic impediment and is
unsupported by its underlying policy rationales. After reviewing the jus-
tifications for and criticisms of the separation policy, Mr. Saba considers
various regulatory and legislative proposals to permit bank involvement
in securities activities, including the FDIC regulations for insured non-
member banks. These restrict bank investments in securities to securities
subsidiaries and affiliates and regulate their relations with their associated
bank. Mr. Saba concludes that these regulations present the best model
for replacing the antiquated Glass-Steagall Act.
In response to actual or perceived abuses of the securities
activities of commercial banks, which were seen as contributing
to the Great Depression, the Glass-Steagall Act was enacted in
1933 to separate the businesses of investment and commercial
banking.1 Even as enacted, the wall separating the two indus-
tries had a number of gaping holes and inconsistencies.2 Today,
* Associate, Jones, Day, Reavis & Pogue, Washington, D.C. B.A. with highest dis-
tinction, University of Virginia, 1982; J.D. cum laude, Harvard Law School, 1985.
1 The Banking Act of 1933, ch. 89, 48 Stat. 162 (codified as amended in scattered
sections of 12 U.S.C.), is popularly known as the Glass-Steagall Act. More frequently,
however, the term Glass-Steagall Act is used to refer only to §§ 16, 20, 21, and 32 of
the Banking Act of 1933, 12 U.S.C. 8H 24 (Seventh), 377, 378, 78 (1982 & Supp. II
1984). This paper adopts the latter convention.
2 For example, the Glass-Steagall Act does not restrict affiliations between nonmem-
ber banks and securities firms, expressly permits banks to engage directly in a number
of securities activities, and only restricts affiliations between member banks and firms
engaged principally in the enumerated securities activities. In addition, securities
firms have successfully exploited the nonbank bank loophole to avoid the restrictions
of the Bank Holding Company Act of 1956, 12 U.S.C. §§ 1841-50 (1982). See, e.g.,
Note, Restrictions on Bank Underwriting of Corporate Securities: A Proposal for More
Permissive Regulation, 97 HARV. L. REv. 720, 725-27 (1984) [hereinafter cited as Note,
Undenvriting Proposal]; see also infra note 62 and accompanying text (discussing recent
developments relating to the nonbank bank loophole); Perkins, The Divorce of Coin-](ViewImageLocal?handle=hein.journals/hjl23&div=10&collection=journals&method=preview&ext=.png&size=3)
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Regulation of State Nonmember Insured Banks' Securities Activities: A Model for the Repeal of Glass-Steagall
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