934, p. 1). With the onset of the Great Depression, the objective of federal banking regulation in the United States became the curbing of competitive forces in the industry. The reason behind this approach to banking regulation was a belief that competitive forces had nearly brought about the collapse of the American banking system in 1929.
The banking regulatory system put into effect was largely the result of responses by the federal government to the financial crises of the late 1920s and early 1930s (Evans, 1984, pp. 439-448). The basic law was the Banking Act of 1933, which was expanded and revised by the Banking Act of 1935 (Kennedy, 1973, pp. 206-221). The Banking Act of 1933 is commonly known today as the "Glass Steagall" Act. These acts extended the authority of the Federal Reserve System beyond the provisions of the Act of 1913.
Glass Steagall provided only minimal control over bank holding companies. The primary impacts of Glass Steagall on bank holding companies were that (1) they were required to submit to regulation and examination by the Federal Reserve Board as a condition of ownership of a commercial bank, and (2) they were required to maintain prescribed cash or easily convertible reserves. Glass Steagall, however, did not proscribe non bank holdings by bank holding companies. This loophole permitted many commercial banking organizations to engage in non bank activities through the bank holding company form of organization thereby partly negating the intent of the law.
Glass Steagall prohibited commercial banks from (1) the speculative use of deposits, (2) acting as agents in security loans to brokers or dealers of financial securities, (3) extending credit for the purchase of financial securities, (4) owning security dealer affiliates. Loopholes pertaining to bank holding companies in Glass Steagall permitted commercial banks to circumvent these prohibitions.
Assistance to commercial banks w...