The Banking Act of 1933 refers to legislation signed into law by President Franklin D. Roosevelt in June of 1933. Four provisions of the Banking Act of 1933, namely Sections 16, 20, 21, and 32, are commonly referred to as the Glass-Steagall Act, while technically speaking the Banking Act of 1933 and the Glass-Steagall Act remain identical.
The Banking Act of 1933 (Glass-Steagall) had two major functions.
First, it separated commercial and investment banking.
- Commercial banking refers to the activities undertaken by commercial banks, namely one of the categories of institutions holding federal depository charters, other than thrifts and credit unions.
- Investment banking refers to the activities undertaken by firms that assist companies, financial institutions, and governments in executing transactions such as mergers and acquisitions (M&A), as well as initial public offering (IPO) underwriting.
This means that the Banking Act of 1933 prohibited commercial banks from engaging in securities underwriting and dealing, and also prohibited investment banks from taking deposits from customers.
Second, it created the Federal Deposit Insurance Corporation (FDIC), thereby providing insurance for depositors and restoring confidence in the payment systems.
The Banking Act of 1933’s separation of commercial and investment banking was a direct response to the concerns arising from the financial crash and subsequent banking crisis in the 1920s and early 1930s. Specifically, federal lawmakers saw the losses incurred from speculative activities in the securities market, along with the resulting damage to the banking system, as one of the key reasons for the Great Depression.
This banking separation resulted in two distinct regulatory schemes in the United States for regulating commercial and investment banking. On the other hand, increased competition and technological innovations following the 1970s resulted in similarities in the products, services, and activities between commercial and investment banking. Regulating these similar products, services and activities through two distinctive regulatory schemes enacted in 1933 resulted in criticism. Additionally, the U.S. Supreme Court’s holdings in cases such as Investment Company Institute v. Camp in 1970 and NationsBank of N. C., N. A. v. Variable Annuity Life Ins. Co. in 1995 also played key roles in reforming the Banking Act of 1933. Moreover, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve Board (FRB), in response to the requests from banks and bank holding companies, both issued a number of administrative interpretations regarding the Banking Act of 1933.
Subsequently, the Gramm-Leach-Bliley Act (GLBA), enacted on November 12, 1999, effectively repealed Sections 20 and 32 of the Banking Act of 1933. The GLBA permitted affiliations between commercial banks and firms undertaking securities underwriting businesses. However, the GLBA did not repeal Sections 16 and 21 of the Banking Act of 1933; the GLBA did not allow commercial banks to offer comprehensive categories of securities-related products to customers and did not allow investment banks to take customer's deposits.
See also: 12 USC - Banks and Banking
[Last updated in December of 2024 by Kai Wang with the Wex Definitions Team]