Gramm-Leach-Bliley Act
This article does not receive scheduled updates. If you would like to help our coverage grow, consider donating to Ballotpedia. Contact our team to suggest an update.
 | |
| Financial regulation in the United States | |
| Dodd-Frank Act | |
| Federal Reserve | |
| Financial regulation by state | |
 | |
| Key terms | |
| Commercial bank • Credit union • Depository institution • Financial system • Investment banking • Securities | |
| Hover over the above terms for definitions. | |
The Gramm-Leach-Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999, was passed in November 1999. The law repealed the Glass-Steagall Act of 1933, which limited securities activities within commercial banks and interactions between commercial banks and securities firms. The passage of the GLBA allowed commercial banks, investment banks, securities firms, and insurance companies to interact in ways not permitted under Glass-Steagall. The GLBA established regulations for the ways financial institutions handle private information about their customers.[1]
Background
According to the Congressional Research Service, the Glass-Steagall Act, also known as the Banking Act of 1933, was enacted to limit the interaction between investment and commercial banks. Prior to the passage of Glass-Steagall, commercial banks and other institutions that accepted deposits from customers would sometimes use that money to make high-risk speculative investments. In some cases, commercial banks would loan money to businesses, then encourage their customers to purchase stock in those businesses. According to the Congressional Research Service, these activities were believed by some to have contributed to the Great Depression, as banks that made high-risk investments with customer deposits were at higher risk of failing in the event that the investments did not pay off.[2][3]
Commonly, Glass-Steagall refered to four specific provisions of the law. These four provisions separated commercial and investment banking by disallowing member banks of the Federal Reserve from dealing in non-governmental securities for customers, investing in non-investment-grade securities for themselves, underwriting and distributing non-governmental securities, or affiliating with any company involved in these activities. Investment banks were also prohibited from accepting deposits from customers.[2][4]
In the 1960s, bank regulators and the Office of the Comptroller of the Currency issued interpretations of the act that allowed banks and affiliates to engage in increasing amounts of securities activities. In the 1970s and 80s, banks and other institutions argued that the restrictions put in place by Glass-Steagall were rendering American banks noncompetitive on the international market. In 1987, the Congressional Research Service, responding to debate over the Glass-Steagall Act, published a report that presented cases for and against repealing Glass-Steagall.[2][4]
Legislative history
In 1987, Senator Phil Gramm (R) and Representative Jim Leach (R) introduced versions of the Financial Services Act in their respective chambers. Representative Thomas Bliley (R), chairman of the House Commerce Committee, was also involved in drafting the House version of the bill. The U.S. Senate passed its version of the bill on May 6, 1999, by a vote of 54-44. The U.S. House of Representatives passed its version of the bill on July 1, 1999, by a vote of 343-86. The bill moved to a joint conference committee to resolve discrepancies between the two versions. The conference committee returned the revised bill to both chambers in November. On November 4, 1999, the revised bill passed the Senate 90-8 and the House 362-57. President Bill Clinton signed the bill into law on November 12, 1999.[5][6]
Provisions
The GLBA repealed the Glass-Steagall Act, a federal law passed in 1933 that regulated the ways in which commercial banks could interact with other financial institutions. With the repeal, commercial banks could consolidate and merge with other financial institutions, such as investment banks and insurance companies.[2][4]
The GLBA also introduced the Financial Privacy Rule and Safeguards Rule.
- The Financial Privacy Rule required that financial institutions provide customers with a privacy notice at the time the institution begins a relationship with the customer (and annually thereafter). This notice would be required to explain what information the institution collects about the customer, how the institution uses that information, where and with whom it is shared, and how the information is protected. It also required that institutions allow customers to opt out of information-sharing and inform customers of any changes in their information policies.[7]
- The Safeguards Rule required financial institutions to develop an information security plan. This plan would be required to describe how the company plans to protect customer information and how it would prepare these safeguards. The rule required that at least one employee of the institution be responsible for the management of an institution's safeguards.[8]
Support and opposition
Support
Former Senator Phil Gramm (R), author of the original Senate version of the GLBA, said the following after its passage:[9]
| “ | The world changes, and we have to change with it. We have a new century coming, and we have an opportunity to dominate that century the same way we dominated this century. Glass-Steagall, in the midst of the Great Depression, came at a time when the thinking was that the government was the answer. In this era of economic prosperity, we have decided that freedom is the answer.[10] | ” |
| —Senator Phil Gramm | ||
At the signing of the act, President Bill Clinton (D) said the following:[11]
| “ | Removal of barriers to competition will enhance the stability of our financial services system. Financial services firms will be able to diversify their product offerings and thus their sources of revenue. They will also be better equipped to compete in global financial markets.[10] | ” |
| —President Bill Clinton | ||
Opposition
Senator Byron Dorgan (D), who voted against the act, said the following:[9]
| “ | I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010. I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.[10] | ” |
| —Senator Byron Dorgan | ||
Senator Paul Wellstone (D) also voted against the act, saying the following after its passage:[9]
| “ | Scores of banks failed in the Great Depression as a result of unsound banking practices, and their failure only deepened the crisis. Glass-Steagall was intended to protect our financial system by insulating commercial banking from other forms of risk. It was one of several stabilizers designed to keep a similar tragedy from recurring. Now Congress is about to repeal that economic stabilizer without putting any comparable safeguard in its place.[10] | ” |
| —Senator Paul Wellstone | ||
Recession of 2008
Politicians and economists debated the role of the GLBA and repeal of Glass-Steagall in contributing to the financial crisis of 2008. For example, according to economist Joseph Stiglitz, "As we stripped back the old regulations, we did nothing to address the new challenges posed by 21st-century markets." In a 2015 interview, former President Bill Clinton, who signed the Gramm-Leach-Bliley Act into law, said, "There's not a single, solitary example that [the repeal of Glass-Steagall] had anything to do with the financial crash."[12][13]
See also
External links
Footnotes
- ↑ Goverment Publishing Office, "Gramm–Leach–Bliley Act," accessed January 10, 2016
- ↑ 2.0 2.1 2.2 2.3 The New York Times, "What Is Glass-Steagall? The 82-Year-Old Banking Law That Stirred the Debate," October 14, 2015
- ↑ Congressional Research Service, "The Glass-Steagall Act: A Legal and Policy Analysis," January 19, 2016
- ↑ 4.0 4.1 4.2 Investopedia, "Glass-Steagall Act," accessed September 29, 2016
- ↑ GovTrack, "S. 900 (106th): Gramm-Leach-Bliley Act," accessed January 10, 2016
- ↑ Office of the Clerk, "Final Vote Results for Roll Call 570," accessed January 10, 2016
- ↑ Federal Trade Commission, "Getting Noticed: Writing Effective Financial Privacy Notices," accessed January 10, 2016
- ↑ Federal Trade Commission, "Financial Institutions and Customer Information: Complying with the Safeguards Rule," accessed January 10, 2016
- ↑ 9.0 9.1 9.2 New York Times, "Congress passes wide-ranging bill easing bank laws," November 5, 1999
- ↑ 10.0 10.1 10.2 10.3 Note: This text is quoted verbatim from the original source. Any inconsistencies are attributable to the original source.
- ↑ The American Presidency Project, "Statement on Signing the Gramm-Leach-Bliley Act," accessed January 10, 2016
- ↑ Vanity Fair, "Capitalist Fools," January 2009
- ↑ Inc., "Bill Clinton on How Entrepreneurs Can Transform the Country," September 2015
