Glass-Steagall Act
The Glass-Steagall Act was a landmark 1933 U.S. banking law that erected a wall between commercial banking and investment banking, prohibiting deposit-taking banks from underwriting or dealing in securities — a separation that stood for over six decades before its partial repeal in 1999.
Formally titled the Banking Act of 1933, Glass-Steagall was enacted in the aftermath of the Great Depression amid widespread belief that banks' involvement in securities markets had contributed to the 1929 crash and the subsequent wave of bank failures. The act also established the Federal Deposit Insurance Corporation (FDIC) to insure bank deposits and prevent the bank runs that had devastated the financial system. Senators Carter Glass and Henry Steagall were the bill's co-sponsors.
The core separation provisions of Glass-Steagall prevented commercial banks — institutions that accept federally insured deposits and make loans — from underwriting, selling, or dealing in securities. Investment banks, which did underwrite securities and trade for clients, were barred from taking deposits. This clean separation meant that a firm had to choose: it could be either a commercial bank or an investment bank, but not both.
Over the following decades, bank regulators incrementally eroded the separation through interpretive rulings that allowed banks to expand into securities activities. The Gramm-Leach-Bliley Act of 1999 formally repealed the separation provisions, enabling the creation of universal banks — large financial conglomerates that combined commercial banking, investment banking, insurance, and asset management under one roof. Citigroup, formed in 1998 through the merger of Citicorp and Travelers Group, was the emblematic pre-repeal institution.
After the 2008 financial crisis, a contentious debate erupted over whether Glass-Steagall's repeal had contributed to the crisis by allowing commercial banks to engage in risky securities activities. Supporters of reinstatement — including Senator Elizabeth Warren and former Fed Chair Alan Greenspan (who later expressed doubt about financial deregulation) — argued that universal banking concentrated risk. Opponents argued the crisis's worst failures involved either pure investment banks (Lehman Brothers, Bear Stearns) or thrifts (Washington Mutual), not universal banks per se.
The Volcker Rule represents the post-crisis compromise: rather than reinstating full Glass-Steagall separation, it restricts specific activities within integrated institutions.