However, the argument that repealing Glass-Steagall caused the financial crisis, and that bringing it back would prevent future crises, is not supported by the facts. Glass-Steagall could not have prevented the bank failures of the 1920s and early 1930s had it been in force earlier, and wouldn’t have averted the 2008 financial crisis had it stayed in force after 1999.
Widespread Depression-era bank failures were primarily due to the fragility of the banking system at that time. Regulations that prohibited branch banking meant that America’s banks were frequently very small, with undiversified loan portfolios tied to the local economy of specific regions. Persistent crop failures and falling real estate values pushed thousands of these banks over the edge. Loan-financed securities speculation — the target of Glass-Steagall — had very little to do with it.
Likewise, during the recent financial crisis, commercial bank failures were largely driven by credit losses on real estate loans. The banks that failed generally pursued high-risk business strategies that combined nontraditional funding sources with aggressive subprime lending. Glass-Steagall would not have stopped any of this. Nor could it have stopped standalone investment banks, such as Lehman Brothers, from running into trouble.
The Cato Institute
November 16, 2016