Big bank earnings for the second quarter are running well ahead of last year, up anywhere from 19% for Wells Fargo (WFC) to 42% for Citigroup (C), with JP Morgan (JPM) falling in between. But those three banks plus Bank of America (BAC) are now 30% larger than they were just five years ago, and “continue to engage in dangerous high-risk practices,” says Massachusetts Democratic Senator Elizabeth Warren.
She’s one of four senators who recently introduced the 21st Century Glass-Steagall Act, which, like the original 1933 statute, would separate commercial banking from investment banking in order to reduce those risks.
Joining Warren are Sens. Mary Cantwell (D-WA), John McCain (R-AZ) and Angus King, an independent from Maine. Sen. King tells The Daily Ticker that the original Glass-Steagall law was “common sense reform that worked for 70 years” and should not have been repealed. “We’re just trying to go back to the future.”
Why now, when big banks have clearly revived themselves?
“The bottom line,” says King, "is we don't want to be on the hook for their gambling" if banks lose on their bets. “If someone wants to go to Las Vegas that’s fine but I just don’t want to pay for it.”
King says "this isn't the 'too big to fail' bill" -- the 21st Century Glass-Steagall Act creates a structural change in the banking system that would require big banks to break up into smaller institutions “in terms of functionality, not size.” Investment banking and traditional commercial banking, with FDIC-insured deposits, would not be “under the same roof,” says King.
The new Glass-Steagall would also be more reliable than the regulatory change created by Dodd-Frank, the banking reform law that followed the financial crisis in 2007-2008, says King. “People can always figure out how to outsmart and get around the regulations.” And, says King, it would complement rather than replace Dodd-Frank as part of a larger effort “to make safer our financial system.”
But does the new bill have any chance of passage in a Congress that is well known for getting very little done? King says it will be “an uphill battle” but not impossible, recalling the immigration bill that recently passed the Senate (though not yet the House). And, he notes there is “a lot of interest in the bill from the public.”
Check out the above video to find out why separating investment banking from commercial banking could make your bank and the banking system safer.
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