Restoring Glass-Steagall Won't Solve Anything

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It's a rare occasion when both major political parties converge on a particular platform or issue — and rarer still when said platform involves the resurrection of an outdated law born of the Depression era.

Yet today, in 2016, we find ourselves in such a scenario. Current discussions around the potential reinstitution of the Glass-Steagall Act — enacted in 1933 to prohibit commercial banks from engaging in the investment business as a response to the Great Depression — are headline-grabbing and emotional. However, Glass-Steagall ultimately has no merit in our current financial environment. It is a relic of an ancient world that no longer exists, where the U.S. was the supreme world power in financial services.

Today, this is far from the case. As of 2015, of the world's 25 largest banks, only four are in the U.S. Quite simply, the “massive” financial institutions we have in the U.S. are not so massive on the global scale.

To reinstate a law that further breaks down these large institutions would put the U.S. at a huge competitive disadvantage, forcing some of the largest American companies to seek out non-U.S. financial institutions for their banking services. We can't disregard the fact that the most sophisticated large borrowers want and expect to have all their financial services in one place, and they will not hesitate to look elsewhere if circumstances require them to.

While it may conjure up nostalgic sentiment or conciliate those who fear another financial crisis, the bottom line is that Glass-Steagall would do nothing to provide for our banking system today. Furthermore, had it been in place in 2007, it would not have prevented the recession or the collapse of financial institutions like AIG, Lehman Brothers or Bear Stearns — none of which were banks, and therefore, not included under Glass-Steagall's legislation.

I agree that we should not allow financial institutions to become too big to fail, or have banks operating in every business. The Dodd-Frank Act, another example of post-crisis legislation, has done a lot to deal with these issues, and has strengthened the financial industry in certain respects. Yet there are also aspects of it that have done little more than add layers of cost and regulatory complexity to banks of all sizes, contributing to lackluster growth in GDP. At this time, our focus should not be on resurrecting another bill from the annals of history, but on analyzing the costs and benefits of our current regulations and figuring out what kind of modern financial system we want to have relative to other global institutions.

Since the 2008 financial crisis, we've taken numerous measures to make the financial industry significantly safer. According to the Financial Services Forum, the largest U.S. banks have become smaller and simpler; capital has doubled and liquidity has tripled among the largest firms. Many larger banks, due to capital requirements, are divesting their subsidiaries and scaling down.

Banks today are safer than ever — from a risk, capital, expense ratio, liquidity perspective, etc. — yet still, they remain the piñata when it comes to our economic woes. Calls to reinstate Glass-Steagall and further restrict the industry only reinforce this narrative.

At the end of the day, banks are here to support the U.S. economy, not to serve as its punching bag. People often want to divorce banking from the economic progress that's going on, when in reality, they are very much related. Banks provide enormous tailwinds to the economy when they are able to do what they do best.

In our current post-recession environment, the focus should be on spurring aggressive economic growth and enabling U.S. competitiveness on a global scale. For this, Glass-Steagall is far from the answer. So what is?

Moving forward, we need to stop the rhetoric and take a pragmatic look at where we are in the economic landscape, where we want to be and the realistic measures that will help us get there. It's time to de-politicize the conversation and think practically about how we can move forward as a major economic player. This includes allowing banks of all sizes, relative to our economy, to work efficiently to provide the services today's financial environment requires.

This is not 2008, and it's certainly not 1933. Let's not allow emotional appeals to a bygone era drive our financial policy. It's time to put the growth of our economy first.

Frank Sorrentino is CEO of ConnectOne Bank and a board member of the American Bankers Association.

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