Diversified Banks Are More Stable

Financial institutions will be more competitive if firms can offer a wider range of products.

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Steve Bartlett is the president and CEO of Financial Services Roundtable.

Recent calls to reinstate the Glass-Steagall Act fail to take into account the long history of banking system regulation, modern safeguards put in place since 2008, and the realities of the global marketplace. The truth is, reinstating the act would threaten industry stability, global competitiveness, and consumer choice in financial services.

The 1933 Glass-Steagall Act restricted affiliations between commercial banks and securities firms. By the 1960s, however, these restrictions were impacting American banks' global competitiveness, and during the 1980s and '90s court decisions eroded much of the law.

 [Rep. Marcy Kaptur: Reinstate the Glass-Steagall Act]

In 1999, policymakers recognized that consumers and the economy would benefit from large, stable, diversified financial institutions, so Congress repealed parts of Glass-Steagall with bipartisan support. Upon signing the repeal, President Clinton said, "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…will also be better equipped to compete in global financial markets."

The repeal allowed commercial banks to affiliate with investment banks and other financial services firms, but those affiliations were not, as some argue, the cause of the 2008 financial crisis. In fact, affiliation helped solve the crisis by letting banks, such as Bank of America, acquire failing firms like Merrill Lynch. Furthermore, repealing Glass-Steagall did not change the long-standing prohibition against banks using insured deposits for investments. That prohibition remains intact today.

[Read the U.S. News Debate: Does the J.P. Morgan Loss Prove the Need for Tougher Bank Regulations?]

In the wake of the financial crisis, government and industry addressed the soundness of financial services by overhauling the regulatory system. Although the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 didn't get everything right, it did put modern mechanisms in place to improve financial stability. Large banks must now comply with extensive regulations, such as capital and liquidity requirements, stress tests, consumer protections, and resolution plans. In the unlikely event that a large bank does fail, the FDIC can isolate and resolve the firm, with the costs paid from assets of the failed institution and assessments on other financial services companies—not by taxpayers.

We must give these modern rules time to work before layering on more regulations, especially given the tepid state of economic growth and employment.

[See a collection of political cartoons on the economy.]

America's 21st-century economy needs large, diversified financial institutions. Big banks support multinational businesses, like Apple and ExxonMobil, which would otherwise require dozens of smaller banks to provide numerous lines of credit, access to capital markets, and foreign-exchange and risk management services. The fact is, banks would be far riskier if not allowed to diversify. The safest banks tend to be the large, diversified ones. Large institutions generally experience less volatility, cyclicality, and concentrated risk, since they are often diversified across business lines and geographies.

The last thing the economy needs is risky, costly divisions of our largest, most successful financial institutions. Doing so would inject massive uncertainty into the system, restrict credit, constrain consumers, and limit their choices, resulting in expensive restructuring of financial agreements for companies worldwide.

What the economy needs is stability and growth-oriented policies. Reinstating Glass-Steagall would be a dangerous step backward.

  • Read Keith Hall: The Serious Cost of a Slow Economic Recovery
  • Read James Rickards: How the Tea Party Helped the Big Banks
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