Lawmakers Move to Rebuild Wall Between Commercial and Investment Banking

By:  The Wall Street Journal - Michael Crittenden
Source: The Wall Street Journal

A bipartisan group of U.S. lawmakers moved Thursday to rebuild the wall between commercial and investment banking activities.

The law would implement what the group is calling "the 21st Century Glass-Steagall Act," in reference to the 1933 law that separated commercial and investment banking activities. The law was repealed in 1999, and some critics have blamed the subsequent commingling of commercial and investment banking activities for helping to fuel the 2008 financial crisis.

The bill written by a group that includes Sen. Elizabeth Warren (D., Mass.) highlights a lingering fear on Capitol Hill that, five years since the financial crisis, banks remain "too big to fail." Ms. Warren, speaking Thursday at a hearing on financial regulation, said policy makers need to take steps to "keep the gamblers out of our banks."

"The four largest banks are now 30% larger than they were just five years ago and they continue to engage in dangerous high-risk practices," she said.

A fact sheet describing the legislation, slated to be introduced Thursday, said it would give banks five years to separate out traditional banking activities, such as offering savings accounts, from investment banking and broker-dealer activities. The goal would be to keep banks that have access to federal deposit insurance from becoming involved with products such as derivatives and other structured financial products.

"Big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured deposits," said Sen. John McCain (R., Ariz.), who also helped author the bill.

The measure is the latest bipartisan attempt to address concerns that the largest and most complex banks could require government help if they began to falter. While Congress and financial regulators have put in place a host of new rules and regulatory infrastructure--including requiring most banks to hold much higher levels of capital to protect against losses–many lawmakers question whether enough has been done.

Earlier this year, Sens. Sherrod Brown (D., Ohio) and David Vitter (R., La.) introduced their own bill to target large banks. Their measure would sharply raise the capital cushions these banks must maintain to Depression-era levels.