On November 8, Acting Comptroller of the Currency Keith A. Noreika explored how the separation of banking and commerce evolved in the United States and called for a broader discussion of whether the separation continues to serve the best interest of the nation’s banking system and economy today. He provided these remarks at The Clearing House Annual Conference in New York City.

In response to the Great Depression, Noreika observed how Congress enacted the Glass-Steagall Act and the Banking Act of 1933, which further separated commercial and investment banking. While he noted that “popular history tells us Glass-Steagall was enacted to eliminate a persistent problem in banking that contributed to the Great Depression,” some more recent research shows, however, that banks that combined deposit and investment banking performed better under stress during the depression than deposit banks without affiliates, and they issued higher quality securities than independent investment banks. Noting that rules and laws “are enacted by people and affected by their personal interests at the time,” Noreika stated that “we must question whether the reasons for decisions made decades ago continue to support the public interest today.”

Noreika also briefly reviewed more recent limits imposed to separate banking from commerce and investing. Though structured differently, Noreika highlighted how the Bank Holding Company Act and the Gramm-Leach-Bliley Act have both allowed certain grandfathered companies to mix banking and commerce by permitting the affiliation of banks and commercial enterprises through a holding company structure. As a result, he observed, “these laws continue to give grandfathered companies advantages not allowed to others.” Furthermore, he pointed to other provisions of federal law, such as section 4(o) of the Bank Holding Company Act, which provide similar exceptions for some firms to mix banking and commerce more freely. “In practice, then, a general prohibition on the mixing of banking and commerce has resulted in the very sort of things the prohibition was set up to prevent: advantaging and aggrandizing a few at the expense of the many,” he stated.

Noreika suggested that a thoughtful response to these special exceptions is to look to the grandfathered companies that continued to commingle banking and commerce, and the companies that have accumulated exceptions, as a means to assess whether these companies perform better or worse than their separated kin. Such an assessment “would provide for a more informed decision on whether continuing to separate banking and commerce still makes sense,” he stated. Noreika pointed to a study of the savings and loan crisis of the 1980s and 1990s that “found no evidence suggesting that limited commingling of banking and commerce poses undue risks to the federal financial safety net.,” and also argued that the recent financial crisis demonstrated that “there is nothing inherently safer about separating banking and commerce or traditional banking and investment banking,” since both banks and commercial investment firms not regulated as banks (Bear Stearns and Lehman Brothers) faltered and contributed to the economic downturn. In his view, “[r]einstating Glass-Steagall or continuing to look for ways to separate banking and commerce even more will not make the system any safer because mixing the two did not weaken the system in the first place.”

Along with providing an historical perspective and overview of why the separation exists in the first place, Noreika focused on whether the separation has any usefulness for today’s economy.

He argued that, in smaller communities, fewer restrictions against mixing banking and commerce “could allow for greater use of local capital, and support growth and business activity locally,” while also helping smaller community banks “grow and take advantage of benefits previously only available to grandfathered companies and banks that are big and sophisticated enough to convince the Federal Reserve to grant them an exception.” Furthermore, he commented that meaningful competition could have a number of other positive effects, such as making more U.S. banks globally competitive and promoting economic opportunity and growth domestically. For banking customers, particularly those underserved by traditional banks, Noreika highlighted how increased competition could result in better banking services, greater availability, and better pricing. “If a commercial company can deliver banking services better than existing banks, we hurt consumers by making it hard for them to do so,” he stated.

While suggesting that the main takeaway from some recent studies is that mixing banking and commerce “can generate efficiencies that deliver more value to customers and can improve bank and commercial company performance with little additional risk,” Noreika cautioned that regulators need to closely watch markets to avoid too much concentration and not enough competition, and also “match any increased complexity in the institutions they oversee with added sophistication and capabilities.” He called for fresh research that looks at banking and commerce in a post-Dodd-Frank world.

We expect that these questions will spark some interesting and informative discussion, with potential ramifications for fintech companies interested in exploring bank charter opportunities or other bank partnership possibilities.