Introduction to Finance

Glass-Steagall Act of 1933 
As previously noted, the “Banking Act of 1933,” 
referred to as the Glass-Steagall Act of 1933, was passed during the Great Depression. This act 
provided for the separation of commercial banking activities and investment banking activities 
in the United States. Some politicians, regulators, and others thought that many bank failures 
during the late 1920s and early 1930s were caused by high-risk investment banking activities 
involving securities underwriting and the holding of equity securities. As a result, the Glass-
Steagall Act was passed. 
Depository Institutions Deregulation and Monetary Control Act of 1980 
In 1980 President Jimmy Carter signed into law the 
Depository Institutions Deregulation 
and Monetary Control Act
,
 
which for ease of reference is often just called the Monetary Con-
trol Act. This act represents a major step toward deregulating banking in the United States 
and improving the eff ectiveness of monetary policy. The two main provisions of the act are 
deregulation and monetary control.
Depository Institutions Deregulation
 
The Depository Institutions Deregulation 
part of the Monetary Control Act was designed to reduce or eliminate interest rate limita-
tions imposed on the banking system, increase the various sources of funds, and expand the 
uses of the funds of S&Ls. One signifi cant change aff ected the Fed’s Regulation Q, which 
established interest rate ceilings on time and savings deposits. Most provisions of Regulation 
Q were phased out by early 1986. Furthermore, state-imposed interest rate ceilings were 
substantially modifi ed, and state restrictions on deposit interest rates for insured institutions 
were eliminated.

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C H A PT E R 3 Banks and Other Financial Institutions
To enable depository institutions to compete eff ectively for funds that were fl owing in 
large amounts to money market mutual funds (MMMFs), negotiable orders of withdrawal 
(NOW) accounts were authorized. While NOW accounts carried interest rates that are more 
competitive with MMMF accounts, they still fell under Regulation Q restrictions. Credit uni-
ons were permitted to issue draft accounts that for all intents and purposes were the same 
as NOW accounts. Federal deposit insurance, which we discuss in greater detail later, was 
increased from $40,000 to $100,000 for each account. This large increase in deposit pro-
tection, although politically popular at the time, is now described as an undue expansion of 
protection. The U.S. Treasury has stated that it undermined market discipline and enabled 
depository institutions to make high-risk loans for which the taxpayers in the long run have 
become liable. To enhance competition among depository institutions, Title IV of the Mon-
etary Control Act amended the Home Owners’ Loan Act of 1933. Federally chartered S&Ls 
were permitted to invest up to one-fi fth of their assets in corporate debt securities, commercial 
paper, and consumer loans. Prior residential mortgage loan restrictions relating to geograph-
ical areas and fi rst mortgage lending requirements were removed. Greater authority was also 
permitted for granting real estate development and construction loans by federally chartered 
S&Ls. In addition, federal savings banks were allowed to make a small number of commercial 
loans and accept some checkable deposits.