Commercial Banks’ Federal ‘Safety Net’

Abstract

Those who do not want the Glass-Steagall Act rescinded argue that the federal government provides commercial banks with a ‘safety net’, which it should not extend to cover securities activities. As the Securities Industry Association (SIA) (1987, p. 2) testifies: ‘The federal government and the taxpayer support the banking system so that banks will perform their role of objective lender to the rest of society, not to support dealing in the capital markets or investment in real estate’. The SIA entitled section II of its statement, ‘The Federal Safety Net, Taxpayer Risk and Unfair Advantage’. Unfortunately, I cannot find a precise definition of the federal ‘safety net’ either in this document or elsewhere. I believe, nevertheless, that those who argue against the federal government’s allowing banks to engage in securities activities have four, somewhat interrelated, aspects of the federal ‘safety net’ in mind: (i) federal deposit insurance; (ii) loans from the Federal Reserve banks’ discount windows; (iii) government intervention to prevent bank runs and a loss of depositor confidence in the banking system; and (iv) government intervention to prevent disruption that the failure of financial service firms might cause.