Introduction

Abstract

Abstract Universal banks arose in the U.S. during two periods in the past century—the 1920s and the late 1990s. On both occasions, universal banks in the U.S. and Europe promoted intense boom-and-bust cycles that led to global calamities—the Great Depression of the early 1930s and the Great Recession of 2007–09. Universal banks received extensive bailouts on both sides of the Atlantic during both crises. Three core features of universal banks cause them to generate destructive boom-and-bust cycles. First, pervasive conflicts of interest prevent them from acting as objective lenders or as impartial investment advisers. Second, bonus-driven cultures encourage their insiders to take speculative risks to produce short-term profits. Third, their ability to convert loans into asset-backed securities allows them to package risky loans into securities sold as purportedly “safe” investments to poorly informed investors. The Glass-Steagall Act of 1933 broke up universal banks and established structural buffers that prevented spillovers of risk between the banking system and other financial sectors. The U.S. avoided systemic financial crises after World War II until Glass-Steagall was undermined by regulators and ultimately repealed by Congress. Congress failed to adopt similar structural reforms after the Great Recession. As a result, universal banks continue to dominate our financial markets and pose unacceptable systemic dangers. We urgently need a new Glass-Steagall Act to break up universal banks again and restore a more stable and resilient financial system.