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August 2, 2017

Were Banks Ever ‘Boring’?

LSE_Were Banks Ever ‘Boring’?

In a previous post, I documented that much of the expansion into nontraditional activities by U.S. banks began well before the passage of the Gramm-Leach-Bliley Act in 1999, the legislation that repealed much of the Glass-Steagall Act of 1933. The historical record actually contains many prior instances of the Glass-Steagall restrictions being circumvented, with nonbank firms allowed to operate as financial conglomerates and engage in activities that go beyond traditional banking. These broad industry dynamics might indicate that the business of banking tends to expand firm boundaries beyond a

Chain Banking

In the earlier part of the twentieth century, before the passage of the Glass-Steagall Act in 1933, U.S. banks routinely carried out commercial banking, securities underwriting, and other activities within the same corporate entity. That model changed after the financial collapse in 1929 and the subsequent Great Depression, with Glass-Steagall mandating a separation between banking and commerce.

Glass-Steagall effectively limited the scope of regulated banking institutions. However, it did not prevent the integration of financial activities by entities that remained outside of its regulatory reach. For example, under Glass-Steagall, it remained possible to operate “chain” or “group” banks, where depository institutions operating in different states could be jointly owned by corporations also able to legitimately own nonbank entities.

The most notable example of such practices was the Transamerica Corporation. This firm was organized in 1928 to consolidate the successful expansion of Bank of Italy (the earliest incarnation of today’s Bank of America) over the previous two decades. Transamerica grew to control banks in many states, together with a wide array of other companies specializing in mortgage financing, insurance, investment securities, public utilities, and much more.

Trusts and One-Bank Holding Companies

The Bank Holding Company Act of 1956, which marks the birth of the modern U.S. banking organizational form, was in large part introduced to end the practice of chain banking. By defining a bank holding company as an organization that owned at least two separate banks, the Act effectively brought any bank group or chain under its authority, thus applying the Glass-Steagall restrictions to those entities as well.

However, the Act itself created a number of other loopholes, as explained in a comprehensive overview of the history of bank holding companies. For example, the meaning of “company” was left subject to interpretation, so that nonbusiness trusts were not subject to the Act. That allowed trust entities to own multiple banks and multiple nonbank businesses without restrictions (the DuPont Family Trust, which had turned into a conglomerate with a very wide business scope, including banks, was probably the most famous example).

At the same time, the Act, with its focus on bank groups, had actually left out from its authority those organizations that only owned one bank, which led to the creation of hundreds of “one bank” bank holding companies—firms that were outside the reach of the Act and therefore able to expand their business scope considerably. These holding company organizations, also known as “financial congenerics,” were thus able to engage in a wide variety of businesses. At their peak, there were 239 such companies, operating hundreds of nonbank subsidiaries engaged in more than a hundred different nonbank activities.

Nonbank Banks

Both loopholes were closed in amendments to the Bank Holding Company Act in 1966 and 1970, respectively, although the 1970 amendment opened another loophole by explicitly defining a bank as an entity engaged in deposit taking and commercial loan making. That definition excluded all deposit-taking institutions that did not engage in commercial lending (to businesses, that is) but may lend to other parties (households, for example). This exclusion thus led to the vast expansion of so-called nonbank banks—that is, conglomerates that controlled such depository institutions while also engaging in a broader range of activities than Glass-Steagall permitted. Nonbank banks were eventually brought under the regulatory umbrella with the passage of the Competitive Equality Banking Act of 1987.

Banking Not that Boring After All

What is the moral of the story here? The point is not to remark that laws and regulations can be too easily circumvented—not at all. Rather, the fact that so many firms have repeatedly chosen to expand their range of financial activities well beyond “boring” deposit taking and loan 
making—under a wide range of market conditions and economic 
circumstances—seems to suggest the existence of economic forces pushing toward broader firm boundaries.

Of course, some of these drivers may not be good from a societal standpoint: perhaps this tendency to expand in scale and scope is just a symptom of managerial entrenchment and a desire for empire building. That’s possible, but such dynamics may also be driven by the existence of synergies and economies of scope. In a recent paper, I actually find evidence in favor of the latter possibility, corroborating a thesis I had presented in previous work: banking conglomerates emerged as an adaptation to a changing intermediation industry, and a similar process has occurred among nonbank financial institutions.

So, was banking ever boring? Not really. And there’s not really a clear way to return banking to this purportedly ideal state. Banking is hardly an immutable industry. Laws may impose restrictions on certain types of entities, but activities may continue to be conducted in various forms, as driven by the ongoing evolution of the industry as a whole. Imposing a twenty-first century Glass-Steagall Act on any institution with “bank” written on its front door might succeed in its immediate objectives: those institutions would probably shrink their systemic footprint. However, to the extent that economic incentives remain in place, financial intermediation activity—and the risks surrounding it—would not be curbed but might just migrate outside the range of the regulatory lamppost. It’s complicated.


The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.

Cetorelli_nicolaNicola Cetorelli is an assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

How to cite this blog post:

Nicola Cetorelli, “Were Banks Ever ‘Boring’?,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 2, 2017,


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The Great Depression created the ABCT purge. That’s what lead to the Golden Era in U.S. economics (where voluntary savings were put back to work). So take the “Marshmallow Test”: (1) banks create new money, and incongruously (2) banks loan out the savings that are placed with them. All savings originate within the framework of the commercial banking system. Saver-holders never transfer their funds outside the payment’s system (unless they hoard currency or convert to other national currencies). But the only way to activate savings is for their owners to invest/spend directly, or indirectly via a non-bank conduit. This is the sole source of both stagnation and secular strangulation. The solution is to drive the commercial banks out of the savings business (where the DFIs and NBFIs, the DFI’s customers have a symbiotic relationship). I.e., money flowing through the non-banks never leaves the payment’s system. What would this do? It would make the DFIs and NBFIs more profitable. It would reverse the decline money velocity…

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