How Glass-Steagall’s Return Would Shatter America’s Hometown Banks

Set against the Main Street backdrop of Cleveland, the drafters of the Republican convention platform pledged support for a banking rule signed into law by Democratic icon Franklin D. Roosevelt.

The GOP platform commendably calls for repeal of many regulations, including provisions of the Dodd-Frank Act, which smothers community banks and credit unions with red tape, at an estimated cost – according to Meghan Milloy of the American Action Forum — of $114 per U.S. resident. But then the platform inexplicably urges “reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment.” Did Elizabeth Warren and Bernie Sanders sneak onto the Republican platform committee?

Before the Republican delegates go home and embrace this latest populist idea, they should seek the insights of hometown banks in Cleveland and other cities. They will find that contrary to the law’s justification as a necessary rein on Wall Street, it will be Main Street banks and business that will be most harmed if Glass-Steagall returns.

A quick look at the facts turns the arguments for Glass-Steagall on their head. We can begin right in Cleveland.

Within a 10-minute walk of the GOP convention’s site, Cleveland’s Quicken Loans Arena, is the downtown branch of KeyBank, housed in the Key Tower building, erected by the bank in 1991. Headquartered in Cleveland, KeyBank is certainly larger than a community bank. Its parent company, KeyCorp, has branches throughout the upper Midwest, with a smattering at the north ends of both coasts, but it’s hardly a Wall Street high roller.

In 2000, a year after Glass-Steagall was repealed through passage of the Gramm-Leach-Bliley-Act— signed by President Clinton and supported by overwhelming House and Senate majorities—KeyCorp applied to the Federal Reserve to become a “financial holding company” under the new law. It did so, according to its annual report to stock holders, in order to “expand the nature and scope of its equity investments … and acquire financial subsidiaries.”

This expansion by KeyCorp and other regional banks gave small businesses new avenues for raising capital. In 2011, The Wall Street Journal reported that regional banks like KeyCorp and Fifth Third Bancorp in Cincinnati “have been adding bankers for stock, bond and loan offerings, as well as mergers and acquisitions,” just as Wall Street was cutting jobs. In the wake of the financial crisis, the Journal observed, this investment banking produced “hefty fees that could help the smaller banks offset declining interest income from their core business of lending.”

Today, KeyCorp’s investment banking subsidiary, KeyBanc Capital Markets, handles many securities offerings for regional firms, giving them an alternative to raising capital on Wall Street. Its website lists dozens of regional businesses for which the bank has launched investment offerings.

Given these facts, it should be no surprise that one of the biggest pushes for passing Glass-Steagall—and against repealing it—have come from large investment banks. As the Heritage Foundation’s Norbert Michel notes, “leading investment banks … lobbied hard for ‘reforms’ to help stave off competition from commercial banks.”

In addition to hindering competition, restoring Glass-Steagall will also increase risk in the financial system. If KeyCorp and other Main Street banks are prohibited from offering both commercial and investment banking, small businesses seeking to raise capital will again have to go through large investment-only firms like the failed Bear Stearns and Lehman Brothers.

Moreover, the implosion of those firms at the start of the housing bust refutes the myth that Glass-Steagall’s repeal had anything to do with the financial crisis.

“None of the investment banks that have gotten into trouble—Bear, Lehman, Merrill, Goldman or Morgan Stanley—were affiliated with commercial banks,” notes Peter Wallison, co-director of financial policy studies at the American Enterprise Institute and commissioner on the Congressionally-created Financial Crisis Inquiry Commission. He further notes that “the banks that have succumbed to financial problems—Wachovia, Washington Mutual and IndyMac, among others—got into trouble by investing in bad mortgages or mortgage-backed securities, not because of the securities activities of an affiliated securities firm.”

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.

Daniel Crowley, a research associate at the Competitive Enterprise Institute, contributed to this article. 

Originally posted to Forbes.