Permissible Securities Activities of Commercial Banks Under the Glass-Steagall Act (GSA) and the Gramm-Leach-Bliley Act (GLBA)

Summary

In the wake of the recession of 2008, there have been calls to reexamine 1999’s landmark financial services legislation, the Gramm-Leach-Bliley Act (GLBA; P.L. 106-102), which repealed certain provisions of the Banking Act of 1933, commonly referred to as the Glass-Steagall Act (GSA; 48 Stat. 162 §§ 16, 20, 21, and 32), which separated, to a certain degree, commercial banking (i.e., the activities engaged in by depository institutions with a bank charter, which this report generally will refer to as “banks” or “commercial banks”) from investment banking (i.e., activities engaged in by securities firms).

This report explains the extent to which commercial banks, their subsidiaries, and affiliates were able to engage in securities activities, including securities underwriting, dealing, and brokerage, under the authorities of the GSA and other pre-GLBA banking laws, most notably the Bank Holding Company Act of 1956 (BHCA; 70 Stat. 133); how the volume and scope of these securities activities expanded over time, especially in the 1980s and 1990s; and how the GLBA changed the GSA construct by facilitating affiliations among commercial banks and securities firms, which paved the way for full-service financial companies like CitiGroup to offer deposit taking and full-scale securities dealing, securities underwriting, investment advising, and brokerage activities within a single holding company structure. To do this, the report first examines the historical differences between the regulatory structure of commercial and investment banks. It then provides a legal overview of the GSA’s restrictions on securities activities and the evolution of how the federal agencies regulating commercial banks interpreted those restrictions over the course of approximately seven decades prior to enactment of the GLBA. The report then analyzes how the GLBA modified the GSA and the BHCA’s securities restrictions and the resulting effect on the structure and activities of commercial banking companies.

The GLBA transformed the financial services regulatory system and structure by repealing certain provisions of the GSA and the BHCA and by establishing the financial holding company structure, which permits commercial banks and full-service investment banks (as well as insurance companies) to coexist under common control. However, GLBA’s changes came after two decades of agency and judicial interpretations of the GSA and the BHCA, which significantly broadened the activities and presence of banks in the securities arena.