On January 21st, US President Barack Obama announced new regulations about financial institutions to limit the scope and size. The new regulations are going to separate investment and commercial banks with stringent regulations.
Some people say that the new regulations are the revival of the ‘Glass Steagall Act’. The Glass Steagall Act was part of the New Deal policy that was imposed in 1933. Some people argued that the great depression appeared due to lax management of commercial banks. This assertion rose and promoted the Glass Steagall Act. Through this law banking, securities and insurance were totally separated. The Federal Reserve System was reinforced and ‘Securities and Exchange Commission (SEC) was established under the glass Steagall Act. However through separation in commercial bank and investment bank, companies had hardships in paying increasing procurement costs in long term investments. As a result, the Glass Steagall Act was abolished in 1999 and the US had to catch up with the global trend. The global trend in the financial industry has been a consolidation of banking, security business and insurance. Two good examples of this where Universal banking in Germany and Bancassurance in France .
Since the start of the 2008 global financial crisis, there has been a growing need for strengthening regulations on financial institutions, particularly which used to be thought “too big to fail”. The reality is that the big banks, the freakish offspring of the Fed’s easy money are dangerous institutions, deeply embedded in a bull market culture of entitlement and greed. Consequently global attention focuses on reforming new financial systems. Barack Obama’s so called Volcker’s rule is cast in the same shadow as the Glass Steagall Act, as the new proposal prevents commercial banks from doing investment banking business.
So what happens if Volcker’s rule formulates the policy? It is too soon to tell. It would take time and efforts for Volker’s rule to be enacted and enforced. It is quite unclear that Volcker’s rule would fulfill its original purposes as it would cause lots of dissonance in separating commercial and investment banks. But we cannot deny the fact there is a need for global coordination in financial regulation.
At the global level, there was a recent discussion about introducing a global bank tax. According to the Financial Times on Feb 11th, Britain’s Prime Minister Gordon Brown suggested there is an upcoming agreement on a global bank levy and at the G20 summit in June the various participating nations will try to reach an agreement about the levy. In addition, the global bank levy has gotten public support and US President Barack Obama stated that they are looking in to imposing a tax on the banks for the responsibility of the global crises on America banks last month.
Last year, Mr. Brown had suggested a ‘Tobin Tax’ on bank dealings. As Tobin tax’s basis premise was consent of global world all over the country, it was considered to be impossible to use the theory in the real world. But, as the IMF was seeking several different ways to impose a tax on dealings among banks, an endorsement on bank levies seems possible at the upcoming April meeting in Washington. According to Mr. Brown, the bank levy imposed by the IMF will carry different aspects compared to US president Barack Obama’s way. In particular, imposing a tax on bank profit, turnover and wage rises. Britain asserts that bank levy should be used as source of tax revenue in each country. G20 countries are skeptical towards the idea that their enormous common fund could be used as savings for large banks in financial crises.
There have been many discussions about how to manage post-crisis financial markets. Volcker’s rule and global bank tax are also part of the discussions and further discussions are needed.
By Han Joo Yeon (email@example.com)