5 ms·

Please, explain to me what difference the Glass Steagall act will make when commercial banks can issue paper that will be bought by deposit banks? Oh, were you

Please, explain to me what difference the Glass Steagall act will make when commercial banks can issue paper that will be bought by deposit banks? Oh, were you just repeating an Occupy Wall Street meme?

wdewind 12y ago
I'm not exactly sure what you mean by commercial banks issuing paper, and deposit banks buying. I think you mean investment banks issuing securities and commercial banks buying? The reason Glass Steagall is important is because it stops commercial banks from needing to behave like an investment bank. Especially with publicly traded banks, you have entirely different types of investors with different expectations investing in investment banks vs. commercial banks, and that puts a huge amount of pressure on the commercial side of a merged bank to behave with similar risk profile to its ibank sibling. When they aren't merged there is significantly less pressure to buy higher risk securities. I think there's huge value in having both an aggressive ibanking system and a separate, stable commercial banking system, so yeah, I think we should bring back Glass Steagall. The occupy wall street quip is unnecessary, don't do that stuff.
- murbard2 12y ago
  I did mean investment bank, thanks for correcting. How are investors putting pressure on a bank? Investors are the owners of the bank, they don't "put pressure", they manage their property. Investors will want their property to grow and issue dividends as much as possible - investment bank or not. Calling it a deposit bank isn't going to change that. The risk profile of investors is also not a consideration. More risk aggressive investors can simply leverage themselves. Investors want the risk level that's appropriate for the business. They may disagree on what that level is, but that disagreement will stem from different strategic outlooks and not from personal preferences. An again: so ibanks cannot fund investments from deposits? That becomes entirely irrelevant the minute you have a liquid commercial paper market. Instead of investing deposits, the ibank will simply borrow money short term from a bank that has deposits. This is what happened in practice. It even happened with companies like GE which became de faco ibanks thanks to their high credit rating. And yes, this means the deposit bank will be exposed to the risks the ibank is taking. If you want to regulate that out, you'll have to require banks be entirely in cash or treasuries. Glass-Steagall won't do.
  - wdewind 12y ago
    The goal is not to make it so commercial banks cannot buy certain securities. The goal is to make it so they don't feel like they have to just to keep up with the Joneses. If they decide independently that they want to run their banks by investing in higher risk securities I'm fine with that, because in the history of banking that's just not what's happened (until, of course, the major parts of Glass Steagall were repealed). Commercial banks tend to have very different customer bases than investment banks, and they have investors* that they can keep happy without investing in higher risk securities. *Edit: /s/customers/investors > Investors want the risk level that's appropriate for the business. How do you determine the appropriate risk level for a business half of whom's goal is to provide explosive growth and half to provide long term, stable, lending? > They may disagree on what that level is, but that disagreement will stem from different strategic outlooks and not from personal preferences. I agree entirely. Don't you agree the strategic outlook of an investment bank is entirely different than that of a commercial bank?
    - murbard2 12y ago
      >Don't you agree the strategic outlook of an investment bank is entirely different than that of a commercial bank? I do which is why banks will specialize in different niches regardless of regulation. No law prevents a cement making company from leveraging itself like crazy and invest it all in high risk / high reward biotech research. And yet you don't see that happening. Also, you fail to address the argument that a liquid commercial paper market gives ibanks de facto access to deposits.
      - wdewind 12y ago
        > No law prevents a cement making company from leveraging itself like crazy and invest it all in high risk / high reward biotech research. And yet you don't see that happening. And yet we did see commercial banks taking massive risk and going bankrupt because of it. Maybe that's ok though, I could certainly buy the argument that that's just the market. > Also, you fail to address the argument that a liquid commercial paper market gives ibanks de facto access to deposits. I don't know what you mean by that. Do you mean ibanks can buy publicly traded commercial bank stocks? Edit: And let's bring this back around: if this is not the appropriate regulation, what is? Open to hearing something better for sure.

wdewind 12y ago

I'm not exactly sure what you mean by commercial banks issuing paper, and deposit banks buying. I think you mean investment banks issuing securities and commercial banks buying? The reason Glass Steagall is important is because it stops commercial banks from needing to behave like an investment bank. Especially with publicly traded banks, you have entirely different types of investors with different expectations investing in investment banks vs. commercial banks, and that puts a huge amount of pressure on the commercial side of a merged bank to behave with similar risk profile to its ibank sibling. When they aren't merged there is significantly less pressure to buy higher risk securities. I think there's huge value in having both an aggressive ibanking system and a separate, stable commercial banking system, so yeah, I think we should bring back Glass Steagall. The occupy wall street quip is unnecessary, don't do that stuff.

murbard2 12y ago
I did mean investment bank, thanks for correcting. How are investors putting pressure on a bank? Investors are the owners of the bank, they don't "put pressure", they manage their property. Investors will want their property to grow and issue dividends as much as possible - investment bank or not. Calling it a deposit bank isn't going to change that. The risk profile of investors is also not a consideration. More risk aggressive investors can simply leverage themselves. Investors want the risk level that's appropriate for the business. They may disagree on what that level is, but that disagreement will stem from different strategic outlooks and not from personal preferences. An again: so ibanks cannot fund investments from deposits? That becomes entirely irrelevant the minute you have a liquid commercial paper market. Instead of investing deposits, the ibank will simply borrow money short term from a bank that has deposits. This is what happened in practice. It even happened with companies like GE which became de faco ibanks thanks to their high credit rating. And yes, this means the deposit bank will be exposed to the risks the ibank is taking. If you want to regulate that out, you'll have to require banks be entirely in cash or treasuries. Glass-Steagall won't do.
- wdewind 12y ago
  The goal is not to make it so commercial banks cannot buy certain securities. The goal is to make it so they don't feel like they have to just to keep up with the Joneses. If they decide independently that they want to run their banks by investing in higher risk securities I'm fine with that, because in the history of banking that's just not what's happened (until, of course, the major parts of Glass Steagall were repealed). Commercial banks tend to have very different customer bases than investment banks, and they have investors* that they can keep happy without investing in higher risk securities. *Edit: /s/customers/investors > Investors want the risk level that's appropriate for the business. How do you determine the appropriate risk level for a business half of whom's goal is to provide explosive growth and half to provide long term, stable, lending? > They may disagree on what that level is, but that disagreement will stem from different strategic outlooks and not from personal preferences. I agree entirely. Don't you agree the strategic outlook of an investment bank is entirely different than that of a commercial bank?
  - murbard2 12y ago
    >Don't you agree the strategic outlook of an investment bank is entirely different than that of a commercial bank? I do which is why banks will specialize in different niches regardless of regulation. No law prevents a cement making company from leveraging itself like crazy and invest it all in high risk / high reward biotech research. And yet you don't see that happening. Also, you fail to address the argument that a liquid commercial paper market gives ibanks de facto access to deposits.
    - wdewind 12y ago
      > No law prevents a cement making company from leveraging itself like crazy and invest it all in high risk / high reward biotech research. And yet you don't see that happening. And yet we did see commercial banks taking massive risk and going bankrupt because of it. Maybe that's ok though, I could certainly buy the argument that that's just the market. > Also, you fail to address the argument that a liquid commercial paper market gives ibanks de facto access to deposits. I don't know what you mean by that. Do you mean ibanks can buy publicly traded commercial bank stocks? Edit: And let's bring this back around: if this is not the appropriate regulation, what is? Open to hearing something better for sure.