A Disappointing Bipartisan Agreement on Banking Regulation

Last night at the Democratic National Convention, Sen. Bernie Sanders (I-VT) gave a speech covering a number of controversial campaign issues, focusing in particular on economic policy. Among other proposals, he endorsed a re-regulation of the banking industry, by bringing back a version of the Glass-Steagall Act. The original legislation was passed in 1933 and restricted affiliations between commercial banks and securities firms. It was effectively repealed when Bill Clinton signed the Financial Services Modernization Act of 1999, also known by the names of its sponsors as the Gramm–Leach–Bliley Act.

Sen. Sanders, unfortunately, is not alone in his desire to resurrect the moldy Wall Street regulations of 83 years ago. In an unusual case of election year agreement between the parties, the platform at the Republican National Convention last week also called for “reinstating” the Glass-Steagall Act. My colleague John Berlau wrote recently in Forbes on why this is not a good idea:

Arguments for Glass-Steagall stem from the flawed premise that trading is inherently risky, while lending is mostly “safe.” In reality, it was poorly written mortgage loans, spurred on the government-sponsored enterprises Fannie Mae and Freddie Mac, and low-income housing lending quotas imposed by the Community Reinvestment Act that were at the heart of the mortgage crisis.

We can free Main Street from the albatross of Dodd-Frank and ensure safety and soundness in the banking system without bringing back a New Deal-era relic that helped concentrate power on Wall Street. The Financial Choice Act, sponsored by House Financial Services Committee Chairman Jeb Hensarling (R-TX), repeals many harmful provisions of Dodd-Frank outright, and frees banks and credit unions of other mandates if they agree to hold higher capital standards and less leverage.

In the exciting new era of FinTech innovations like crowdfunding and peer-to-peer lending, which promise consumers more access, choices, and information than ever before, it’s time to put Glass-Steagall and Dodd-Frank where they belong, in a museum, and let “Uber for finance” bloom.

More material on CEI’s banking and finance work can be found here. Trey Kovacs’ take on the labor and employment provisions in the Democratic platform is here.