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Is the Glass-Steagall Act Justified? A Study of the U.S. Experience with Universal Banking before 1933

Randall S Kroszner and Raghuram Rajan

American Economic Review, 1994, vol. 84, issue 4, 810-32

Abstract: The Glass-Steagall Act of 1933 removed commercial banks from the securities underwriting business. The authors evaluate the argument for the separation of commercial and investment banking that conflicts of interest induce commercial banks to fool the public into investing in securities which turn out to be of low quality. A comparison of the performance of securities underwritten by commercial and investment banks prior to the act shows no evidence of this. Instead, the public appears to have rationally accounted for the possibility of conflicts of interest and this appears to have constrained the banks to underwrite high-quality securities. Copyright 1994 by American Economic Association.

Date: 1994
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Handle: RePEc:aea:aecrev:v:84:y:1994:i:4:p:810-32