Following the repeal of certain provisions of the 1933 Glass-Steagall Act via the Gramm-Leach-Bliley Act in 1999, banks in the United States have been allowed to engage in a limited range of insurance-related activities.
While banks cannot underwrite insurance policies themselves, they can partner with or own insurance agencies to sell insurance products to their clients.
Before the repeal, banks could not sell insurance to their clients. The original purpose of Glass-Steagall Act restrictions was to maintain the integrity and stability of the financial system.
Glass-Steagall Act Established Regulatory Separation
The Glass-Steagall Act also known as the Banking Act of 1933, was a landmark banking legislation in the United States. It was enacted during the Great Depression to address concerns about the role of banks in contributing to the financial crisis and to prevent potential conflicts of interest between banking and securities activities.
Key Provisions of the Glass-Steagall Act:
- Banking Separation & Speculative Securities - introduced the separation between commercial banking and investment banking. It established that commercial banks, which accept deposits from the public and provide traditional banking services, could not engage in securities underwriting and dealing activities including stocks and bonds.
- Establishment of the FDIC - created the Federal Deposit Insurance Corporation (FDIC) to provide insurance coverage for bank deposits up to $250,000 per FDIC-insured bank
- Separation of Insurance and Banking - prevented banks from entering the insurance business.
Gramm-Leach-Bliley Act (GLBA) or Financial Services Modernization Act
The Gramm-Leach-Bliley Act repealed conflict of interest prohibitions of the Glass-Steagall Act, which previously imposed strict separation between commercial banking, investment banking, and insurance activities. GLBA preserves the independence of each sector while permitting underwritings and limited financial holding company affiliations.
Key Provisions of the Gramm-Leach-Bliley Act:
- Expanding Banking Activities - GLBA permitted commercial banks to engage in a wider array of financial activities, including securities underwriting and dealing as well as insurance underwriting and sales.
- Financial Holding Companies - introduced the concept of "financial holding companies". Holding companies can provide banking, securities, and insurance services under the same corporate umbrella.
- Privacy Provisions - protects consumers' privacy by requiring financial institutions to disclose their information-sharing practices and allowing consumers the right to opt out of certain information-sharing.
- Federal Deposit Insurance Corporation Improvement Act (FDICIA) - GLBA made amendments to the Federal Deposit Insurance Corporation Improvement Act to address various issues related to the banking industry, such as bank mergers, acquisitions, and interstate banking.
Gramm-Leach-Bliley Act (GLBA) Caused the Financial Crisis of 2008?
Critics of GLBA argued that it contributed to the financial crisis of 2008, as the legislation enabled the creation of large and complex financial institutions engaging in riskier practices. Some critics believed that the repeal of certain provisions of the Glass-Steagall Act weakened the separation between commercial banking and investment banking, potentially exposing depositors' funds to higher risks.
Others argued GLBA's reforms were necessary to modernize the financial industry and allow for greater competition and innovation. They contended that the financial crisis resulted from a combination of factors including lax regulatory oversight and the proliferation of complex financial products.
In the aftermath of the 2008 financial crisis, there were calls to reinstate some form of Glass-Steagall-like separation between commercial and investment banking activities.