A bipartisan team of Senators is looking to resurrect the Glass-Steagall Act

On Thursday Senators Elizabeth Warren (D-Mass.), John McCain (R-Ariz.), Maria Cantwell (D-Wash.), and Angus King (I-Maine) introduced the 21st Century Glass-Steagall Act, a modernized version of the Banking Act of 1933.

The legislation would separate traditional banks, with savings and checking accounts that are insured by the Federal Deposit Insurance Corporation, from riskier financial institutions that offer services such as investment banking, insurance, swaps dealing, and hedge fund and private equity activities.

The bill, which provides for a five-year transition period, also separates depository institutions from products that did not exist when Glass-Steagall was originally passed, such as structured and synthetic products including complex derivatives and swaps.

The original Glass-Steagall legislation was introduced in response to the financial crash of 1929 and separated depository banks from investment banks. Starting in the 1980s, regulators at the Federal Reserve and the Office of the Comptroller of the Currency reinterpreted longstanding legal terms in ways that slowly broke down the wall between investment and depository banking and weakened Glass-Steagall, the sponsors of the new legislation said in a statement. In 1999, after 12 attempts at repeal, Congress passed the Gramm-Leach-Bliley Act to repeal the core provisions of Glass-Steagall.

The proponents say the new bill would clarify regulatory interpretations of banking law provisions that undermined the protections under the original Glass-Steagall, minimizing the likelihood of a government bailout.”

Since core provisions of the Glass-Steagall Act were repealed, “a culture of excessive risk-taking has taken root in the banking world,” McCain said in a statement.

"Big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured deposits,” he added. “If enacted, the 21st Century Glass-Steagall Act would not end Too-Big-to-Fail.  But, it would rebuild the wall between commercial and investment banking that was in place for over 60 years.”

"Despite the progress we've made since 2008, the biggest banks continue to threaten the economy," said Senator Elizabeth Warren, citing a statistic that the four biggest banks are now 30 percent larger than they were just five years ago.

A statement issued by Americans for Financial Reform, a coalition of national and state organizations, supported the new legislation, praising its efforts to close loopholes that weakened the original law. “This new legislation strengthens the original Glass-Steagall language by adding clear prohibitions on commercial bank involvement in a range of dealer, trading, and derivatives market activities, while still preserving the ability to engage in traditional trust and fiduciary roles,” it says.  

The text of the proposed bill can be found here. A fact sheet is also online.  

The bill is likely to renew debate over the so-called Volcker Rule, a long-delayed cornerstone of the Dodd-Frank Act that places limits on proprietary trading by banks, except for the permissible activities of hedging, market making, and underwriting. It would also limit the ability of banks to own hedge funds and private-equity funds. The rulemaking has been delayed for nearly three two years by debates over how to effectively define those exceptions, and an overall reticence by banks to take on new regulations that could impact their liquidity.