Not even Sandy Weill could answer the question: What economic or financial problem would be solved by a return to the Depression-era Glass-Steagall Act? Perhaps he is not expected to. His TV interlocutors did not really press him on the point, leaving him vaguely to suggest it might help banks with their public relations issues. Maybe it would or maybe it wouldn't, but financial policy should transcend concern about banking industry PR.
Financial policy should not transcend involvement in the tough, very detailed work of crafting a practical bank supervision program that fits the American economy, still by far the largest and most diversified economy in the world, thanks in no small part to having the best and most diversified financial system in the world. The modern, neo-Glass-Steagall advocacy has a mystical quality about it, an appeal that proposes to rise above the tough debate over the thorny details and reach back to a mythical time when bank regulation worked so very well, equated in an ineffable way with the Glass-Steagall Act. The appeal is to be taken on faith; the only questions allowed being a tired catechism with each answer being "break up the big banks."It is hard to get its advocates past their ecstasy and focused on details such as cause and effect and how Glass-Steagall would help America's banking customers.
Last year at a symposium held by the Federal Reserve Bank of Chicago, I presented a list of some two-dozen types of banks in contemporary America, differentiated by charter, business model, size, geography and other factors. My point was that behind each of these banks is a group of customers who believe their bank is the best choice for their financial needs. The goal of a regulatory system with the purpose of serving customers should be to support that variety, not dislocate customers. That was a dynamic list, by the way, constantly changing as customer needs and preferences change.
Wrestling with and addressing the issues of how best to serve American customers in an evolving economy are exactly what produced the Gramm-Leach-Bliley Act of 1999 (GLBA). There was and is no religious attachment to the 1999 law, as no one then or since claimed that GLBA was perfect, and most predicted it would need revision as the economy continued to evolve. It was, however, the product of decades of review and real-world experience with the weaknesses of the Glass-Steagall Act. The careful work grounded in the reality of the American economy explains the bipartisan (or non-partisan) result, uniting arguably the most conservative member of the Senate, Phil Gramm of Texas and perhaps the Senate's most liberal member, Paul Sarbanes of Maryland, who were joined by 88 more of their colleagues to pass the law. It was supported by all of the federal financial regulators and strongly advocated by the Clinton Administration.
Rather than impugn that work, the experience of the recent recession has reaffirmed its wisdom. Because of the 1999 legislation, there were well-diversified firms ready in 2008 and 2009 to pick up the pieces of the much less diversified (and Glass-Steagall modeled) firms Bear Stearns, Lehman Brothers, Merrill Lynch and even Washington Mutual and Wachovia Bank. None of those failing firms was too big to fail, in part because there were financially stronger firms available to ensure the essential services of those failed firms would continue to be provided to their customers.
There are important lessons to be learned and reforms to be applied from our recent financial trauma. Reaching back into the midst of the Depression would hardly seem to be an auspicious place to look for answers that will work. The Dodd-Frank Act was a partisan effort at reform. It surely is not working as well as advocates had hoped. While implementation drags on, the financial system remains in regulatory crisis and the economy languishes. A more bipartisan effort focused on providing the best answers to serve all of our nation's diverse financial customers is needed and hopefully will be taken up in earnest by the next Congress.
In the meantime, here is a question for those who would arbitrarily break up banks: What is the optimal size for a bank in America? The best answers break-up advocates offer are the findings of their own personal meditations, for conversion to national policy. What are the customers in the marketplace telling us about the optimal sized bank? Many.
Wayne A. Abernathy is executive vice president for financial institutions policy and regulatory affairs at the American Bankers Association. Previously he served as assistant secretary of the Treasury for financial institutions and was staff director of the Senate Banking Committee when Congress enacted the Gramm-Leach-Bliley Act.