Barack Obama once again made a breakthrough. This time refers to the thoughts of former Central Bank governor Paul Volcker. Thought is not far from the Banking Act of 1933 which is better known as the Glass-Steagall Act. Act was sponsored by Carter Glass and Steagall B Hendry.
Law was out in 1933 after the Great Depression. Core of the Glass-Steagall Act that prohibited commercial banks collaborate with brokerage firms or participating in investment banking activities. This law created to protect depositors from the additional risk from securities transactions.
At that time, the bank, for example, could be the issuance of stock underwriters. If the shares they do not sell jajakan, they bought using funds from the depositors. Often it without the knowledge of the depositor. Transactions for the sake of the bank is known as prop trading.
However, the Act was abolished in 1999. Consequently, the difference between commercial banks and securities increasingly blurred. Finance minister when the post was held by Lawrence Summers. The new law allows commercial banks, securities, and insurance united. According to Summers, this way the U.S. financial industry can grow and compete better.
With the new law, born of financial giants like Citigroup, a combination of commercial bank Citicorp and Travelers Group insurance company.
This mixing triggered conflicts of interest and is considered as one of the roots of the financial crisis.
Not heard
For months, Paul Volcker proposed a plan to fix Wall Street, which is making a clear boundary line between commercial banks and investment banks. Since the revocation of Glass-Steagall Act, which allowed institutions to collect funds allowed third parties to produce benefits not only from the old ways, shed credit and charge interest, but running hedge funds and speculative ways of others.
Volcker said that since their insured deposits of the central government, large banks may take risks that ultimately must be borne by the taxpayers. He insisted that the incentives are structured, totally unfair and the root of the crisis. It needs to be done for the U.S. banking system is to improve incentives to avoid a similar crisis.
For months, Volcker also ideas not heard by Obama administration. Both reform proposals from the government and the parliament based on the approach “too big to fall”. Approach translated by way of increasing capital requirements, making mechanisms of government bailouts and improve supervision of systemic risk.
U.S. financial system seems to minimize such risks. One reason for the perception that some financial firms “too big to fall”. Under Volcker rule, only commercial banks are not too risky just to enjoy that status. Investment banks, hedge funds and private equity firms have to rely on ourselves. Commercial banks may not engage in the activities of hedge funds and private equity funds because of conflict of interest in normal banking relationships.
