Editing Glass–Steagall legislation (section)

==Separating commercial and investment banking==

The Glass–Steagall separation of commercial and investment banking was in four sections of the 1933 Banking Act (sections 16, 20, 21, and 32).<ref name="name" /> The [[Banking Act of 1935]] clarified the 1933 legislation and resolved inconsistencies in it. Together, they prevented commercial Federal Reserve member banks from:
* dealing in non-governmental securities for customers
* investing in non-investment grade securities for themselves
* underwriting or distributing non-governmental securities
* affiliating (or sharing employees) with companies involved in such activities

Conversely, Glass–Steagall prevented securities firms and investment banks from taking deposits.

The law gave banks one year after the law was passed on June 16, 1933, to decide whether they would be a commercial bank or an investment bank. Only 10 percent of a commercial bank's income could stem from securities. One exception to this rule was that commercial banks could underwrite government-issued bonds.<ref>{{Cite web|title=Banking Act of 1933 (Glass-Steagall) {{!}} Federal Reserve History|url=https://www.federalreservehistory.org/essays/glass-steagall-act|access-date=2021-10-01|website=www.federalreservehistory.org}}</ref>{{citation needed|date=October 2019}}

There were several "loopholes" that regulators and financial firms were able to exploit during the lifetime of Glass–Steagall restrictions. Aside from the Section 21 prohibition on securities firms taking deposits, neither savings and loans nor state-chartered banks that did not belong to the Federal Reserve System were restricted by Glass–Steagall. Glass–Steagall also did not prevent securities firms from owning such institutions. [[Savings and loan association|S&L]]s and securities firms took advantage of these loopholes starting in the 1960s to create products and affiliated companies that chipped away at commercial banks' deposit and lending businesses.<ref>Michael Brandl, ''Money, Banking, Financial Markets & Institutions'' (Boston: Cengage Learning, 2020), 306-8. {{ISBN|1337904821}}</ref>

While permitting affiliations between securities firms and companies other than Federal Reserve member banks, Glass–Steagall distinguished between what a Federal Reserve member bank could do directly and what an affiliate could do. Whereas a Federal Reserve member bank could not buy, sell, underwrite, or deal in any security except as specifically permitted by Section 16, such a bank could affiliate with a company so long as that company was not "engaged principally" in such activities. Starting in 1987, the Federal Reserve Board interpreted this to mean a member bank could affiliate with a securities firm so long as that firm was not "engaged principally" in securities activities prohibited for a bank by Section 16. By the time the GLBA repealed the Glass–Steagall affiliation restrictions, the Federal Reserve Board had interpreted this "loophole" in those restrictions to mean a banking company ([[Citigroup]], as owner of [[Citibank]]) could acquire one of the world's largest securities firms ([[Salomon Smith Barney]]).{{citation needed|date=October 2019}}

By defining commercial banks as banks that take in deposits and make loans and investment banks as banks that underwrite and deal with securities the Glass–Steagall act explained the separation of banks by stating that commercial banks could not deal with securities and investment banks could not own commercial banks or have close connections with them. With the exception of commercial banks being allowed to underwrite government-issued bonds, commercial banks could only have 10 percent of their income come from securities.{{citation needed|date=October 2019}}