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European Central Bank Doesn't Like Glass-Steagall

Following a major international mobilization led by Lyndon LaRouche for a global Glass-Steagall policy, and after Jean-Claude Trichet himself was put on the spot by an SAS journalist at his April 8 press conference on that very issue, the European Central Bank has responded... by attacking any such separation of investment and commercial banking. In its latest Financial Stability Review, the Bank devotes one paragraph to an attack on the Volcker Rule, to which it provides a two-page explanation on the U.S. Glass-Steagall Act, deliberately blurring the crucial differences between the two policies.

Indeed, the Glass Steagall Act of 1933 defined a total institutional separation between commercial and investment banks, with the former restricted to taking deposits and issuing loans and mortgages, that is traditional banking that services the real economy. Commercial banks were strictly forbidden to engage in stock brokerage, investment banking, or what is today called proprietary trading, i.e. speculating with their own money. While investment banks were allowed to engage in such proprietary trading, they, contrary to commercial banks, were not entitled to any assistance from the government, such as deposit insurance.

Furthermore, with Franklin D. Roosevelt's creation of the Securities and Exchange Commission, regulations where drafted and enforced that made "financial instruments" such as derivatives illegal. The Volker Rule, however, envisions no such strict institutional division, but only bans commercial banks from engaging in proprietary trading, or owning hedge funds and private equity firms.

Even that is too much for the ECB, which writes that the "Volcker Rule" initiative "brings back to the regulatory landscape a modified version of the Glass-Steagall restrictions on banks' securities business." As background to the discussion, it presents an "overview of the main arguments and analytical results - including its limitations - surrounding the original Glass-Steagall Act in the light of the recent crisis from a European perspective." The June 2010 Stability Review goes so far as to present a study claiming that there was no need to introduce such an Act in the first place. Today, it states, introduction of a Volcker rule-style of regulation, "runs counter to the European established model of universal banking" and would "hamper further financial integration of the Single Market."

Any attempt to limit universal banks' involvement with hedge funds or private equity funds, the report itself states would introduce "potential distortions to the functioning of the internal market in the EU." What they fail to note is that the European "universal banking model" has created a universal financial crisis.

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