Phil Gramm Freed the Banks

Gramm-Leach-Bliley Act was passed as recently as 1999, but I don’t remember hearing anything about this. Anyway, I did some research.

This Act was a huge coup by the banking industry. This bill allowed banks to things that they never could before, like leverage. investment because of decreased requirement on ow much capital they had to keep on hand. Why this bill zoomed through Congress and was signed by President Clinton is a mystery to me. All of the Republicans in Congress supported this bill. I think that all of the Democrats opposed it. (It passed on a party line vote, 55 to44.)

Below is a brief summary of the bill.


  • Repeals the restrictions on banks affiliating with securities firms contained in sections 20 and 32 of the Glass-Steagall Act.
  • Creates a new “financial holding company” under section 4 of the Bank Holding Company Act. Such holding company can engage in a statutorily provided list of financial activities, including insurance and securities underwriting and agency activities, merchant banking and insurance company portfolio investment activities. Activities that are “complementary” to financial activities also are authorized. The nonfinancial activities of firms predominantly engaged in financial activities (at least 85% financial) are grandfathered for at least 10 years, with a possibility for a five year extension.
  • The Federal Reserve may not permit a company to form a financial holding company if any of its insured depository institution subsidiaries are not well capitalized and well managed, or did not receive at least a satisfactory rating in their most recent CRA exam.
  • If any insured depository institution or insured depository institution affiliate of a financial holding company received less than a satisfactory rating in its most recent CRA exam, the appropriate Federal banking agency may not approve any additional new activities or acquisitions under the authorities granted under the Act.
  • Provides for State regulation of insurance, subject to a standard that no State may discriminate against persons affiliated with a bank.
  • Provides that bank holding companies organized as a mutual holding companies will be regulated on terms comparable to other bank holding companies.
  • Lifts some restrictions governing nonbank banks.
  • Provides for a study of the use of subordinated debt to protect the financial system and deposit funds from “too big to fail” institutions and a study on the effect of financial modernization on the accessibility of small business and farm loans.
  • Streamlines bank holding company supervision by clarifying the regulatory roles of the Federal Reserve as the umbrella holding company supervisor, and the State and other Federal financial regulators which ‘functionally’ regulate various affiliates.
  • Provides for Federal bank regulators to prescribe prudential safeguards for bank organizations engaging in new financial activities.
  • Prohibits FDIC assistance to affiliates and subsidiaries of banks and thrifts.
  • Allows a national bank to engage in new financial activities in a financial subsidiary, except for insurance underwriting, merchant banking, insurance company portfolio investments, real estate development and real estate investment, so long as the aggregate assets of all financial subsidiaries do not exceed 45% of the parent bank’s assets or $50 billion, whichever is less. To take advantage of the new activities through a financial subsidiary, the national bank must be well capitalized and well managed. In addition, the top 100 banks are required to have an issue of outstanding subordinated debt. Merchant banking activities may be approved as a permissible activity beginning 5 years after the date of enactment of the Act.
  • Ensures that appropriate anti-trust review is conducted for new financial combinations allowed under the Act.
  • Provides for national treatment for foreign banks wanting to engage in the new financial activities authorized under the Act.
  • Allows national banks to underwrite municipal revenue bonds (more… )