Glass–Steagall: legislation, limits and loopholes

This article is about 1933 United States Federal legislation that limited the interaction of commercial and investment banking. It analyzes the content of four sections of the Banking Act of 1933, which came to be known as "Glass-Steagall," and describes the content of the legislative text and its limits/loopholes.

For broader coverage of Glass-Steagall, including its history, similar legislation, regulatory and industry reactions, and repeal, see the main article, Glass–Steagall Act. For full coverage of the 1933 Banking Act, see the main article, Banking Act of 1933.

The Glass–Steagall separation of commercial and investment banking was in four sections of the 1933 Banking Act (sections 16, 20, 21, and 32).

Section 16 prohibited national banks from purchasing or selling securities except for a customer’s account (i.e., as a customer’s agent) unless the securities were purchased for the bank’s account as “investment securities” identified by the Comptroller of the Currency as permitted national bank investments. Section 16 also prohibited national banks from underwriting or distributing securities.

Section 16, however, permitted national banks to buy, sell, underwrite, and distribute US government and general obligation state and local government securities. Such securities became known as “bank-eligible securities.”

Section 5(c) of the 1933 Banking Act (sometimes referred to as the fifth Glass–Steagall provision) applied Section 16’s rules to Federal Reserve System member state chartered banks.

Section 20 prohibited any member bank of the Federal Reserve System (whether a state chartered or national bank) from being affiliated with a company that “engaged principally” in “the issue, flotation, underwriting, public sale, or distribution” of securities.

Section 21 prohibited any company or person from taking deposits if it was in the business of “issuing, underwriting, selling, or distributing” securities.

Section 32 prohibited any Federal Reserve System member bank from having any officer or director in common with a company “engaged primarily” in the business of “purchasing, selling, or negotiating” securities, unless the Federal Reserve Board granted an exemption.

Sections 16 and 21 contradicted each other. The Banking Act of 1935 “clarified” that Section 21 would not prevent a deposit taking company from engaging in any of the securities underwriting and dealing activities permitted by Section 16. It also amended Section 16 to permit a bank to purchase stocks, not only debt securities, for a customer’s account.

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