Updated Glass-Steagall would make banks put people before profits

Stress tests, tight regulations and nearly a decade of low interest rates are a few of the proposals policymakers rallied around following the 2008 financial crisis.

While these reforms have helped shore up markets and restrict bad actors, small financial institutions as well as American consumers have been slow to climb out of financial ruin compared to big banks. With many economists predicting a recession on the horizon, Congress should look to mitigate the fallout.

{mosads}One proposal worth consideration is a modernization of the Glass-Steagall Act. With bank fees hitting record highs, an ever-growing portfolio of billion-dollar fines and egregious breaches of consumer trust, banks have gotten away from serving main street.

The largest banks no longer focus on providing consumers with affordable loans and financial products. Instead, they prefer to line the pockets of their shareholders.

For example, savings from the most recent tax cut were expected to be passed along to consumers and their employees. But, according to a recent study, these same big banks are planning to boost shareholder dividends and other payouts by more than $28 billion through mid-2019 instead. How is this consumer centric?

With GDP growth reaching north of 4 percent and the housing market recovering along with strong employment numbers, the economy is humming. But the 2008 financial crisis looms large for Americans who had their personal savings wiped out, homes foreclosed upon and pink slips handed to them.

History has a knack for repeating itself. That’s why it is time for lawmakers to consider ensuring banks’ past misdeeds are not normalized or accepted as status quo.

To be clear: The Glass-Steagall Act would not have prevented the 2008 crash, but it might have helped blunt its impact. There is reason to believe that repealing Glass-Steagall contributed to the rise of “too big to fail.” Today, concerns about “too big to fail” institutions remain, as Republican and Democratic lawmakers continue to raise red flags.

A 21st-century Glass-Steagall Act would promote a more competitive marketplace and a safer and more sound financial system. Building a firewall between investment and commercial banking would ensure these two segments of banking stay mutually exclusive.

It would also ensure Wall Street banks can no longer gamble with American consumers’ personal savings on the trading floor.

As is the nature of economic cycles, ups and downs are constant, but some downs are worse than others. “Too big to fail” institutions, coupled with excessive, unbridled risk-taking, will have a catastrophic impact on the American economy and wreak havoc on consumers’ financial well-being. A new policy approach to Glass-Steagall, however, could help mitigate the damages incurred by American consumers.

A 21st-century Glass-Steagall would:

• protect consumers against future financial crises;
• ensure traditional depositories can continue to thrive in a stable financial marketplace; and
• reduce the competitive inequalities and moral hazard that arises when large banks take risks on consumer deposits to generate profits.

Over the past decade, consolidation has taken root throughout the financial services industry. The total number of credit unions have dropped by nearly 30 percent, furthering the dominance large institutions have on the market.

Should Wall Street banks’ risky investment practices go awry, will American consumers be required to foot the bill?

Without Glass-Steagall, the Federal Deposit Insurance Corporation’s (FDIC) insurance fund can now be used to back up big banks’ risky trading activities, thereby holding American public responsible for losses. Separating commercial and investment banking activities would make sure American taxpayers do not subsidize big banks.

A modern Glass-Steagall could also reduce the risks posed to the U.S. economy by “too big to fail” institutions. A study by the Government Accountability Office found big banks and their shareholders benefited by up to $70 billion between 2011 and 2012 by virtue of their “too big to fail” status, as investors believed the federal government would provide taxpayer-funded bailouts during a crisis.

A modern approach to the law would restrict banks’ ability to make risky bets with consumers’ savings and reduce their overall size, thereby limiting the likelihood of future bailouts and economic turmoil.

Today’s political environment is ripe for action. There have been recent bipartisan efforts in the Senate to enact a 21st-century version of the Glass-Steagall Act.

In addition, both Republicans and Democrats agreed in their 2016 party platforms that reinstating Glass-Steagall could bring much-needed security and stability to our economy and help protect consumers.

Reforming our financial system and reinstating a modernized Glass-Steagall Act would allow credit unions and other institutions to compete and reduce the prevalence of “too big to fail” financial institutions.

Congress should debate this reform and help steer the banking industry back to a culture where people come before profit.

Carrie Hunt is the executive vice president of government affairs and general counsel of the National Association of Federally-Insured Credit Unions.