Ten years after the capstone of financial industry deregulation — the Financial Modernization, or Gramm-Leach-Bliley, Act — the United States is facing the worst economic crisis since the Great Depression. The following policy brief outlines six key principles for comprehensive and meaningful systemic risk reform, which are necessary to undo many of the ill-advised deregulatory measures of the past 20 years, including the four key changes wrought by the Gramm-Leach-Bliley Act.
Demos is working to restore common sense financial regulations that would have pre-vented the current crisis and will pave the way for a more prosperous and stable economy in the long-term.
Comprehensive and meaningful systemic risk reform must undo many of the ill-advised deregulatory measuresof the past 20 years, including the four key changes wrought by the Gramm-Leach-Bliley Act, signed on November2, 1999:
- The Act repealed the final lines created by the Glass-Steagall Act of 933 to segregate commercial banks from the inherently riskier investment banks, allowing the aggregate institutions to become bank holding companies benefiting from government protections including access to cheap loans from the Fed.
- The Act also erased the lines created by the Bank Holding Act of 956 to divide insurance companies from banking institutions.
- The Act allowed bank holding companies to apply for a newly expanded status: “financial holding companies,” which still enjoy government protections but are more loosely regulated, with lower capital requirements and greater leeway to speculate and conduct non-financial activities.
- Finally, the Act allowed certain types of derivatives transactions to trade outside of regulated exchanges, giving birth to, among other things, the unregulated credit default swap market.
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