Risky Banking Practices

banking practices
Many risky banking practices contributed to financial losses in the stock market before the beginning of the Great Depression. An important corrective measure was the Banking Act of 1933. This law was also known as the the Glass-Steagall Act.

Almost immediately after the Banking Act of 1933 was put into place, the financial firms began lobbying for “deregulation” of banks. Ultimately these institutions apparently decided that their cause for deregulation would be enhanced if other industries were deregulated first.

This approach gained full momentum under President Reagan. Even though banks were not yet deregulated, they began acting as if they were and the savings and loan crisis was just the first result. During the 1990s, Citicorp attempted a merger with Travelers Group that was ruled to be illegal because it combined banking, securities, and insurance activities in one company. This was a direct violation of the Glass-Steagall Act.

Instead of forcing these two companies to abandon their merger, Congress (with a lot of help from bank lobbyists) decided to abolish the Glass-Steagall Act and replaced it with the Gramm-Leach-Billey Act (also known as the Financial Services Modernization Act of 1999). Some observers refer to this date as the financial equivalent of “The Day the Music Died” in the Don McLean classic (American Pie). The rest is history. The first chapter in this new financial history book was the Enron scandal, the second chapter was subprime mortgages, the third chapter was the banking crisis of 2008, and the fourth chapter is a work in progress.

Bankers have been seeking less controls and regulations governing their financial activities since the beginning of banking time. After Thomas Jefferson served as President of the United States over 200 years ago, he spent a great deal of his time and energy trying to convince everyone that bank changes were needed. While there are different variations of this quote making the rounds because Jefferson repeated it often and said it a little differently each time, he said the following:

  • “Banking establishments are more dangerous than standing armies.”
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