Repeal of the Glass-Steagall Act in 1999 enabled investment and commercial banking arms of U.S. banks consolidate into bank holding companies. While the repeal maintained firewalls between investment and commercial banking arms of bank holding companies, it created a much larger problem that regulators either did not anticipate, or did not think would turn out to be as severe as it apparently has turned out.
In 2004, while a PhD Candidate at the RH Smith School of Business (Univ. of MD, College Park), I discussed with my Dissertation Supervisor how it was I thought repeal of the Act would backfire, would turn out harmful for capital markets. We discussed engaging on a research idea in respect of my intuition, but then I graduated in 2005 and we never did get around to it.
The issue I pointed out to my Dissertation Supervisor was my belief that given it would be bank holding companies as a whole that would be priced, profits from investment banking arms would be considered substitutes for profits from commercial banking arms. With bank holding companies publicly quoted, and with investors typically skittish for higher returns, bank holding companies likely would focus more on the bottom line than on their fiduciary responsibilities to society. It is important to note here that while commercial banks are private concerns set up to make money from lending activities, lending simultaneously has social welfare connotations, as such is considered a fiduciary responsibility of commercial banks. This is part of essence of oversight from the Federal Reserve.
Given fiduciary responsibilities that obtain within bank holding companies mostly are domiciled in context of commercial banking, possibility of abstraction from fiduciary responsibilities fit right into my intuition.
If there is easy money to be made within securities markets, there is less pressure to lend to businesses most in need of debt financing.
Add to chasing of quarterly profits introduction of securitization of bank balance sheets, a phenomenon which favors investment banking arms (firewalls are unable to prevent such benefits), yet simultaneously reduces dependence of commercial…