Nov. 12, 2009 will commemorate the 10-year anniversary of the most significant piece of financial services regulation to be enacted since the Great Depression. When President Clinton signed the Gramm-Leach-Bliley Act (GLB) into law, the financial services industry faced strong pressures for deregulation of the rigid structure imposed during the Great Depression. Amidst today's financial crisis and resulting debate regarding financial services regulation, GLB has become a target. Some critics, including such influential voices as Joseph Stiglitz and Paul Krugman, both Nobel Laureates, have argued that the "modern" regulation contributed to the crisis by encouraging more risk, ultimately leading to the bailout of some of the nation's largest financial institutions. We would argue, though, that GLB has done just what it was intended to do: enhance competition, encourage product innovation, improve customer service and make banks more efficient.

The technologies that automated many banking services and reduced the importance of a bank's geographic location in serving its customers were not imagined when the Glass-Steagall Act of 1933 was enacted. By repealing Glass-Steagall, Congress sought to break down barriers that limited financial institutions' activities to specific functions or product lines, and to improve the efficiency of how financial products were delivered. GLB allowed U.S. financial institutions to provide the seamless "one-stop shop" for their customers, a service that European banks were already offering through their "universal banking" services.

While some critics expressed concern that GLB would enable global mega-banks to dominate commercial banking, investment banking, brokerage and insurance business, these concerns did not bear out. Yes, the big banks have gotten larger, but 600 mostly small and regional banks are also using their status as financial holding companies to sell more products and services.

Perhaps a greater impact of GLB was the expansion of product lines within existing firms - primarily in the distribution of new products secured through inter-firm agreements. GLB's legacy seems to be that it fostered innovation in how products were offered, versus the creation of new products.

Some critics have linked GLB to controversial products such as collateralized mortgage obligations and credit default swaps, but the investment banks that developed these products would have been able to do so as readily without GLB. More importantly, the subprime mortgage-backed securities market, which was central to the foreclosure and financial crisis, was developed and nurtured by non-regulated institutions, not banks. Instead, GLB enabled banks to offer menus of products that were based on customers' likely financial needs at particular stages in their lives. For example, an auto loan customer might also be interested in insurance; and a senior club depositor might have an interest in annuity services. Primarily through acquisition, GLB enabled financial institutions to form financial holding companies that marketed a wide range of financial services. Some holding companies created and delivered the services in-house. However, over time many opted to source these products from specialty firms, distributing products in response to customers' needs.

Financial regulation is coming under close scrutiny in the U.S. as it should, not necessarily because it was a direct cause of the current crisis, but because the financial services sector has evolved in ways unanticipated by any previous legislation.

GLB may be credited as a factor in the growth and international competitiveness of the U.S. banking industry and for dramatically improving the solvency of the nation's banks. Even as the Troubled Asset Relief Program (TARP) grabbed national headlines, banks were reaching a historical peak in their ratio of capital to assets. GLB made possible the mergers that resolved many of the institutional failures in the financial crisis, including Bear Stearns and Merrill Lynch. Even Goldman Sachs and Morgan Stanley benefited by becoming bank holding companies, which would have been impossible without GLB.

In short, GLB has made the financial services industry more resilient to economic and financial shocks by creating substantial diversification among organizations while reducing the concentration of risk in the U.S. banking system. GLB has enhanced financial organizations' innovation and improved convenience for businesses and consumers.

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