Restore Glass-Steagall

[Selatius]

38. Volcker Rule is stronger as far as legal definitions go, but it's weaker compared to ...

the structural, institutional firewalls that were erected under Glass-Steagall in the wake of the crash of '29 and the Great Depression. Glass-Steagall effectively isolated commercial banking activities from investment activities to avoid conflicts of interest and "betting against" the customer that was a problem in the 1920s.

The legal definitions of what is and isn't permissible under the Volcker Rule are fine for the time being, although Volcker himself wished that the bill was simplified as far as definitions go from what it currently is. (He favored a simple four page bill outlining the Rule and the power for regulators to go after bankers if they found ways to get around the legal definitions outlined), but unlike Glass-Steagall, there is no structural requirement to split banking and investment activities from each other. The only consistent criticism of the Volcker Rule is that it becomes difficult to define what is and isn't proprietary trading from "permitted banking activities" at the margins. It is this gray area that can give rise to further abuses, thus why Volcker himself wished for a simplified set of definitions and broader regulatory powers in the event that someone is technically meeting the Rule but is also breaking the spirit of the Rule itself.

With the repeal of Glass-Steagall in 1999 under the Financial Services Modernization Act, it would be impractical to go back to that law given the structural changes that have happened in the 13 years since then. However, I'm convinced a solid compromise could simply be that banking and investment activities within a banking company should be split into separate divisions more so than currently is. Further, the commercial banking division should be required to maintain independent capitalization and ownership without actually requiring the bank to formally spin off the division into a true separate company. In this manner, the commercial banking division's activities are less subject to manipulation from the investment side of things for the simple fact that this division has now a strong internal incentive to prevent anybody on the investment side from betting against instruments sold by that division and to ensure that the instruments sold are solid and have a low risk of default or some other credit event.