The Story Behind Bank Re-Regulation

President Obama threw down a challenge to the banking industry yesterday when he announced plans to increase regulation on large banks, undoing decades of deregulatory efforts that reached their height in 1999 with the repeal of the Glass-Steagall Act. Glass-Steagall was a Depression-era law that separated commercial and investment banking. In making the announcement, the president was adopting the plan long advocated by former Federal Reserve Chairman Paul Volcker.

Richard Kovacevich, the now-retired chairman of Wells Fargo & Company, explained the long history of banking deregulation during a major speech to The Commonwealth Club in San Francisco on October 21, 2008. He discussed the competition between banks and non-bank financial organizations, and the restrictions on how banks could do business, that left big banks feeling as if they had to compete with one hand tied behind their backs.

In the United States, up until the 1980s, banks were highly regulated, with severe restrictions on what products could be offered. Regulators determined the maximum [interest] rates that could be paid on deposits -- known as Regulation Q -- and state usury laws dictated the maximum amount you could charge for loans. Since banks were not allowed to pay a market rate of interest, they gave premiums, so-called "toasters," to open or increase deposits. Banks were restricted to branches in only their home state, and only very few states had statewide branching. This made all banks geographically concentrated.

The large banks then began to find innovative ways around restrictions, creating new financial products and lobbying for legislative changes. That work reached its apex in the 1999 Glass-Steagall repeal.



You can watch Kovacevich's complete speech -- plus his Q&A with the audience -- in the video above.

In the wake of the worldwide financial panic of the past year and a half, governments around the globe have reacted with various announced plans to try to reign in banking systems they deem to have overstepped their bounds. On November 10, 2009, former Goldman Sachs Managing Director Nomi Prins told The Commonwealth Club that the risks posed by these "too big to fail" institutions is even greater today and that a deep re-structuring of banking is necessary. Listen to the audio of Prins' speech here.

The Financial Times notes that this will be a long process, and the end result is not yet known. "Bankers  said the lack of detail and the likelihood of a protracted debate in Congress would give them the chance both to lobby for changes and to adapt their businesses, with, for example, Goldman [Sachs] possibly givin gup the financial holding company status it adopted in the financial crisis," the paper reported today.