The Banking Act of 1933

Running head: THE BANKING ACT OF 1933 1
The Banking Act Of 1933

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THE BANKING ACT OF 1933 2
The glass-Steagall act effectively separated commercial banking from investment
banking. Underwriting and dealing in securities were effectively banned for commercial banks,
which received deposits and disbursed loans. A year after the act was signed into law,
institutions had the option of focusing on commercial or investment banking. Commercial banks
were only authorized to earn 10% of their overall revenue from securities, but an exception
enabled them to underwrite government-issued bonds (Olson, 2017). The act also led to creation
of federal deposit insurance corporation.
In response to commercial banks' engagement in stock market investment, the Stegall
Act separated commercial and investment banking. to assure that banks' assets are used in the
most efficient way, to regulate interbank control, to minimize undue diversion of funds into
speculative activities, and for other reasons the legislation was enacted to provide financial
institutions with emergency financing in order to improve the federal reserve system's
capabilities for the service of trade, industry, and agriculture. In order to meet the demands of
member banks in unexpected circumstances, processes must be in place.
The financial sector in the United States was defined by the fact that it was conducted
both at both the state and federal level. US banks were not allowed to offers commercial services
in the areas of securities, insurance, and real estate as compared in numerous nations. Last but
not least, the ability to own a bank in the United States was prohibited. There was a limit on the
amount of money banks could invest in industrial enterprises and the amount of money that
major corporations could invest in banks. While considerable banking sector reforms have
resulted in the US banking system being consolidated, the scope of banking operations permitted
in the US has also expanded during the same time period (Papadimitriou, 2020). In contrast to
other nations, where monetary policies were and are implemented by the central bank, the United
States' monetary policies were and are implemented by the board of governors of the Federal
Reserve System.
Separation of investment and commercial banks has the following advantages. For
starters, the utility components of banking are protected against losses incurred by higher-risk
investing operations. secondly, the problem of non-performing asset is addressed when
commercial banks are separated from investment banks. Thirdly, there is no conflict of interest
when separation occurs. Separating commercial and investment banking usually ensure there is
no conflict of interest (Akiyoshi, 2019). Fourthly, Separation usually ensures that banks are not
bureaucratic and are flexible. This helps them work with large established customers and take
into consideration smaller customers or businesses. Separation usually ensures that there is no
concentration of monopoly power in hands of large bankers.
The disadvantages of separation between commercial and investment banks includes:
there is no economies of scale. Its through universal banking that result in greater economics
efficiency in the form of low cost and higher output. Separation will always have high cost. In
separation there is no profitable diversions. This makes it harder for banks to utilize existing
skills in single type of financial service they are offering. There is no resources utilization and
also marketing of the bank is made difficult (Akiyoshi, 2019).

Reference
Akiyoshi, F. (2019). Effects of separating commercial and investment banking: Evidence from
the dissolution of a joint venture investment bank. Journal of Financial
Economics, 134(3), 703-714.
Olson, J. S. (2017). CHAPTER II. The Emergency Banking Act of 1933. In Saving
Capitalism (pp. 25-41). Princeton University Press.
Papadimitriou, T., Gogas, P., & Agrapetidou, A. (2020). The resilience of the US banking
system. International Journal of Finance & Economics.

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Running head: THE BANKING ACT OF 1933 1

The Banking Act Of 1933

The glass-Steagall act effectively separated commercial banking from investment

of federal deposit insurance corporation.

member banks in unexpected circumstances, processes must be in place.

investing operations. secondly, the problem of non-performing asset is addressed when

concentration of monopoly power in hands of large bankers.

The disadvantages of separation between commercial and investment banks includes:

also marketing of the bank is made difficult (Akiyoshi, 2019).

the dissolution of a joint venture investment bank. Journal of Financial

Capitalism (pp. 25-41). Princeton University Press.

system. International Journal of Finance & Economics.

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