The Glass-Steagall Act (1933) separated depository institutions from investment banks and limited securities, activities, and affiliations within commercial banks and securities firms.
In 1933, in the wake of the 1929 stock market crash and during a nationwide commercial bank failure and the Great Depression, two members of Congress put their names on what is known today as the Glass-Steagall Act.
Congress repealed the Act in 1999, and this has now allowed securities firms and insurance companies to purchase banks. The decline in traditional banking does not mean that traditional banking became less profitable.
Reasons for the Glass-Steagall Act
Commercial banks were accused of being too speculative in the pre-Depression era, not only because they were investing their assets but also because they were buying new issues for resale to the public. Thus, banks became greedy, taking on huge risks in the hope of even bigger rewards.
Banking itself became sloppy and objectives became blurred. Unsound loans were issued to companies in which the bank had invested, and clients would be encouraged to invest in those same stocks.
The Effects of Repealing the Glass-Steagall Act
Banks now account for approximately 30% of financial assets and liabilities.
Accepting deposits and making loans are now a smaller portion of a bank’s activities.
3. Off Balance Sheet
There is more activity of loan sales, fees and derivates trading (off-balance sheet activities).