The structure of the banking industry and the nature of what is commonly called “banking” has changed dramatically over the last twenty-five years as the result of the dissolution of legal restrictions on interstate banking and branching, as well as on the financial services that banking organizations can offer. Deregulation has accelerated banking industry concentration. As of June 30th, 2020, the 13 banking organizations with greater than $250 billion in assets accounted for 56% of total industry assets. These firms include not only traditional banking organizations, but securities firms that had become banking organizations, like Goldman Sachs and its consumer bank Marcus.
Professor Arthur E. Wilmarth, Jr. of George Washington University has been among the most persistent and able critics of banking deregulation. In his new book, Taming the Megabanks, he presents a masterful summation of this critique by chronicling the history of universal banking – engagement by banks in securities activities – and its consequences. He then makes a powerful argument for the separation of the banking, insurance, and securities industries.
The debate over the scope and scale of banking is not new; in fact, it is recurring. Taming the Megabanks begins with a review of the legal and regulatory restrictions on bank powers at the turn of the Twentieth Century and tells how large banks, led by National City of New York, worked their way around them. As a result, banks took on a central role in the underwriting and distribution of domestic and foreign bonds, and eventually, common stock. This, in turn, led to a dangerous leveraging of the markets, serial disasters, and, ultimately, the Great Depression.
In the aftermath of the Crash and Depression, Congress investigated the securities operations of banks. The results were devastating, revealing unethical if not illegal conduct by bank managements, glaring conflicts of interest in the offering and sale of securities, and an overall lack of prudence. The investigation’s findings and public outrage over the banks’ uses and abuses of their power led to the passage of the Glass-Steagall Act in 1933.
Glass-Steagall had five major provisions: (i) prohibition of banks engaging in securities activities; (ii) prohibitions of “nonbanks” accepting deposits; (iii) establishment of federal deposit insurance; (iv) prohibition of interest on demand deposits and limiting interest rates on demand deposits; and (v) banning interstate branching by banks and preserving state control of intrastate branching. In 1956, Congress passed the Bank Holding Company Act (BHC) that, among other things, provided for similar restrictions on activities and interstate operations by holding companies. According to Professor Wilmarth, Glass-Steagall and the BHC succeeded. From the end of World War II into the 1970’s, there were no major financial crises.
The animal spirits lay dormant for a few decades but were not dead. Starting in the 1970’s, under the leadership of “visionaries” such as Walter Wriston of Citibank (successor to National City of Depression Era fame), banks began a campaign to break down the regulatory barriers that, they argued, unduly constrained them. Interest rate ceilings on deposits were the first to go, followed by restrictions on interstate banking and branching, and, finally, the separation of banking securities and insurance. There followed a substantial consolidation of the industry, concentration of assets in fewer and larger banks, and entry into other financial services businesses. Capital markets expansion included securitization of consumer loans (particularly, but not exclusively, home mortgages) and over-the-counter derivatives. What followed is well-known: the mortgage market melt-down of 2007 / 2008, the Financial Crisis and the Great Recession. While the financial crises of 1929 and 2008 are not the same, they do rhyme. Having failed to learn the lessons of history, we relearned them – sort of.
Congress responded to the Financial Crisis by passage of bail-out legislation and the Dodd-Frank Act. Professor Wilmarth is critical of Dodd-Frank as implemented and of related post-crisis regulatory and monetary policies that, in his view:
have produced a fragile and volatile global financial system, which depends on continuous infusions of central bank liquidity to support universal banks, large shadow banks, and the capital markets … a global “doom loop, ” in which governments, central banks, universal banks, shadow banks and capital markets are locked together in a dangerous web of mutual dependence.
In his view, further action is necessary – a new Glass-Steagall Act.
Professor Wilmarth’s proposal for a new Glass-Steagall Act is interesting for what it does and does not include. Of the five major provisions of the original Glass-Steagall, his new Glass-Steagall contains only two. It mandates separation of banking and securities by prohibiting banking organizations from conducting most securities and insurance activities and prohibiting nonbanks from offering money market mutual funds with immediate redemption at par. Insurance of bank deposits is not mentioned, nor are interest rate ceilings. Professor Wilmarth does not expressly propose limiting bank size or geographic scope; rather, he takes the optimistic view that spinning off securities operations would result in a downsizing of the megabanks and that community banks would take up the slack. As has been the case in all legislation passed after financial crises, the new Glass-Steagall would reduce the discretion of bank supervisory agencies, in this case by denying Chevron deference to their decisions in areas covered by the statute.
Professor Wilmarth has made a powerful and well-documented argument for change; but will anything come of it? Taming the Megabanks has been published during a crisis that is profoundly different from those that it describes. The United States and much of the rest of the world faces a continuing public health crisis and a related economic downturn. It also faces, again with the rest of the world, the daunting prospect of climate change and the economic transition necessary to address it. While I am sympathetic to much of what Professor Wilmarth proposes, I wonder whether, in our current circumstances, dismantling institutions that comprise the majority of our financial system or shrinking a pillar of the repo system that is integral to global finance is, or should be, a matter of first importance. Global finance does, as noted above, involve a web of mutual dependence. Reconfiguring it will take time and skilled hands.
Which brings me to related point. At its core, the discussion about taming the megabanks is about power. It is the latest round in the struggle between capital and the sovereign that began in the Renaissance. At the outset, the struggle was between bankers and princes; now it is between bankers and we the people. It is a complex struggle because each side has always found the other useful. Renaissance sovereigns needed financing for wars, public ceremonies, and ecclesiastical appointments. During the first era of universal banking in the United States, the Federal Government found National City and its syndicates useful in distributing the Liberty bonds that financed World War I and the Young Plan loans that financed German reparations thereafter. In more recent times, the megabanks contributed to a brief, albeit illusory, increase in the US home ownership rate and were viewed as necessary to our nation’s role as a global financial power. Even in the ashes of what followed there remains a technology-driven payments system that is arguably critical national infrastructure. We have received public benefit from our banking system; Professor Wilmarth makes clear such benefits came at too high a price.
Bank supervisory and regulatory policy has traditionally been about what we don’t want: financial instability, concentrated power, discrimination. Sooner or later, we the people deserve a different, and I believe better discussion: about what we do want from our financial system: equity, security, and provision for the needs of the real economy. In having that discussion, we should have in mind history’s lessons. There are few better places to inform our historical understanding than Taming the Megabanks.
Joseph A. Smith, Jr. is senior fellow at the Global Financial Markets Center
 Arthur E. Wilmarth, Jr, Taming the Megabanks: Why We Need a New Glass Steagall Act (Oxford University Press 2020).
 Ibid, p. 148.
 Ibid, p.149.
 A fascinating rendition of this deregulatory campaign may be heard in an interview of Richard Kovacevitch, retired CEO of Wells-Fargo on the Duke FinReg Pod, available at: https://thefinregpod.libsyn.com/the-rise-and-fall-of-wells-fargo-with-dick-kovacevich . Mr. Kovacevitch started his banking career at Citibank under Walter Wriston.
 Wilmarth, op cit. n. 2, p. 325.
 Ibid, p. 349.