Module 4 discusses the changes to the US banking industry that occurred during the 1990s and into the early 2000s. These were the first major changes in decades. The prior major change was the introduction of the Glass-Steagall Act in the 1930s, and the changes discussed in the module essentially undid much of that act.
One of the key elements in Glass-Steagall was the separation of investment banking and commercial banking activities (Heakal, 2015). One of the reasons for this separation was that investment banking was inherently more speculative, and there was a recognition following the 1929 stock market crash that even if investment banking suffered significant volatility, the nation's economy relies on having a stable commercial banking environment. Olson (2002) noted that the 1999 Gramm-Leach-Billey Act basically dismantled Glass Steagall.
One of the other key things that Glass Steagall prevented was investment bank speculation in commercial activities, such as residential real estate. The backdrop to this study is that after Gramm-Leach-Billey, investment banks began to seek out commercial banking income, not as much by buying commercial banks, but by creating investment funds in real estate. The commercial banking and real estate markets were completely unprepared for this influx of capital, and by Olson (2002) so was the Federal Reserve. A radical change in residential real estate markets occurred, and the outcome was basically that a lot...
References
CFtech.com (1998). Understanding how Glass-Steagall Act impacts investment banking and the role of commercial banks. CFTech.com. Retrieved October 28, 2017 from http://www.cftech.com/index.php/the-brainbank-archive/special-reports/404-understanding-how-glass-steagall-act-impacts-investment-banking-and-the-role-of-commercial-banks
Heakall, R. (2015) What was the Glass-Steagall Act? Investopedia. Retrieved October 28, 2017 from http://www.investopedia.com/articles/03/071603.asp
Olson, (2002) Remarks by Governor Olson. Federal Reserve Bank of St. Louis. Retrieved October 28, 2017 from http://www.investopedia.com/articles/03/071603.asp
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