A restriction on bank activities that was repealed in 1999 was
A. minimum down payments on loans to purchase securities.
B. separation of commercial banking from the securities industries.
C. restrictions on credit terms.
D. the prohibition of the payment of interest on checking deposits.
The correct answer and explanation is:
The correct answer is B. separation of commercial banking from the securities industries.
In 1999, the Gramm-Leach-Bliley Act (GLBA), also known as the Financial Services Modernization Act of 1999, effectively repealed the Glass-Steagall Act‘s provisions that had previously required a separation between commercial banking and securities activities. The Glass-Steagall Act, passed in 1933 during the Great Depression, was designed to prevent banks from becoming too involved in risky securities trading. This separation was seen as a way to reduce the risk of conflicts of interest and limit the potential for financial instability.
However, by the late 20th century, the financial landscape had changed significantly. Advancements in technology and financial markets led to the belief that such separation was no longer necessary. The Gramm-Leach-Bliley Act allowed commercial banks, investment banks, and insurance companies to merge and provide a broader range of services. This act enabled banks to engage in securities trading and other non-banking financial services, which led to the consolidation of the financial industry.
Proponents of the repeal argued that it would increase competition, create more efficient financial markets, and provide consumers with better access to a range of services. Critics, however, warned that it could lead to the formation of “too big to fail” financial institutions, which might increase systemic risk and contribute to financial crises.
The repeal of this restriction was significant in the evolution of the U.S. financial system, and it paved the way for the massive consolidation of banks and financial services firms in the years that followed. However, the 2008 financial crisis highlighted some of the risks associated with these changes, leading to renewed debate about financial regulation.