Why Megabanks Fear the Return of Glass-Steagall: QuickTake Q&A

Would the world be a safer place if banks came in two flavors -- dull but safe versus exciting but risky? That was the idea behind a law adopted in the U.S. during the Great Depression known as Glass-Steagall. But that tenet was undone in 1999, a move that’s been blamed by some for the 2008 market crash. Bringing that system back has won the support of politicians as diverse as President Donald Trump and Senator Elizabeth Warren, the Massachusetts Democrat who’s been one of Wall Street’s toughest critics. During the campaign, Trump called for a "21st century” version of Glass-Steagall and repeated in May that he’s considering going "back to the old system." But there’s plenty of opposition, and not just among Republicans. Some critics think going back is impossible or prohibitively disruptive. Some think the old rules miss the point of where the risks in the system now lie.

Passed in 1933, the Glass-Steagall law essentially split banking into two categories: deposit-taking companies backed by taxpayers that primarily made loans to businesses and consumers, and investment banks and insurers that traded complex securities, managed initial public offerings of companies and created bonds out of mortgages and auto loans. The Great Depression was triggered by the popping of a stock market bubble stoked by overleveraged investors who had borrowed heavily from banks to buy shares. Walling securities trading off from lending would prevent deposits from flowing into more volatile capital markets, Congress reasoned.