CaptainJJack

Reinstituting Glass-Steagall: Not as Easy as It Sounds

The issue is leverage.

If you do not allow investment banks to lever up, they cannot make an ROE sufficient enough to stay in business. It is risky, the margins are thin, given the risk, and the good ones mark to market their entire portfolios every day, but if the ROEs are there, they do not need retail charters.

On the other hand, Commercial Banks had generally been in higher risk loans, concentrated regionally, using retail deposits. Their margins are much higher, there is much more book value accounting, versus mark to market, and prudence dictates that they keep low leverage ratios.

The beauty of Glass Steagall was that it established clear boundaries between the two, and I believe it was tossed out as part of a larger effort to allow banks to operate in more than one state.

The other argument that G-S makes the US less competitive is nonsense. Anybody who has followed Investment Banking knows that it is a business of celebrities, and Commercial Banks have not been very effective competitors. And, the only foreign banks that have done well in the investment banking area are those that focus on investment banking.

Finally, allowing Investment Banks to accept retail deposits is setting us up for disaster. The Goldman and Morgan Stanley Commercial bank charters should cease to exist ---like tomorrow.