Introduction to Finance

Glass-Steagall Act of 1933
recognizing those individu-
als responsible for introducing and supporting the act, provided for the separation of commer-
cial banking and investment banking in the United States. Many banks failed during the late 
1920s and early 1930s, and eff orts were undertaken to assess why banks failed. Some politi-
cians, regulators, and others thought that many of the bank failures had been caused, in part, 
by investment banking activities involving underwriting and the holding of equity securities. 
The result was passage of the Glass-Steagall Act.
After more than six decades, the Glass-Steagall Act was repealed with the passage of the 
Gramm-Leach-Bliley Act of 1999
. When Glass-Steagall was enacted, many offi
cials and 
individuals believed that government regulation was the answer to avoiding banking excesses 
and mismanagement. An underlying belief was that competition and free markets represent 
the best way to manage banking risks and create stability in the fi nancial system. Commercial 
banks were no longer prohibited from engaging in investment banking and insurance under-
writing. Likewise, insurance companies and investment banking fi rms could engage in com-
mercial banking. Universal banking was permitted in the United States, as in various other 
countries. A 
universal bank
is a bank that engages in both commercial banking and invest-
ment banking. Germany also has universal banking, and the United Kingdom does not legally 
separate commercial banking from investment banking.
However, as a result of the 2007–08 fi nancial crisis and the 2008–09 Great Recession, 
government offi
cials and others promoted the need to move toward more re-regulation of 
fi nancial institutions to help restore fi nancial stability in the United States. The result was the 
passage in 2010 of the Dodd-Frank Wall Street Reform and Consumer Protection Act which 
we will briefl y discuss later in this chapter.