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Ben Azzarita
Campbell
UWRT 1103
April 12, 2016
Is Big Banking too big?
Although banking has changed a lot since it was first created by the Mesopotamians
in the 18th century BC, the main idea behind it has stayed around the same. Back during the
18th century BC, rich farmers or merchants would loan money to poorer farmers so they
could buy seeds to farm their lands. Once the harvest was over the farmer would either sell
his goods to pay back the loaner or give the owner a portion of his return. This allowed
richer farmers/merchants the opportunity to increase their wealth and allowed the poorer
farmer a better opportunity to survive. This mutual beneficial relationship allowed the art
of banking to flourish for centuries. Yet the question is, does it work in todays society?
In the United States, the concept of banking has meant different things at different
times (DeYoung). Over the past 2 centuries the United States banking system has evolved
from a single, central bank into a web-work of local, regional and national banks. When the
first Bank of the United States opened in 1791, the bankers were very strict on the process of
getting a loan. Almost all of the loans that were accepted were short term loans, 30 to 60
days, in order to make sure they had enough cash available in case of an emergency. Over
time the restrictions on loans became more lenient, allowing more people to get loans. This
caused the first banking epidemic in United States history, the bankruptcy of second Bank of

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the United States. This bankruptcy created a 30 year period where State government took
control of banking in the United States. To put it lightly, it ended awfully. By the end of the
30 years period there were over 10,000 different pieces of currency being circulated by nonconnected banks. In order to fix the problem of lack of order in banks and currency issues,
President Abraham Lincoln passes two bills to address these problems. The National
Currency Act of 1863, which created the American Dollar, and The National Bank Act of
1864, which allowed for creation and chartering of commercial banks (Sylla). The
National Bank Act created a system where the national government could charter private
banks and merge into regional groups under the governments jurisdiction. This created a
situation where both the national and state government ran its own set of banks, which was
called a dual banking system (Sylla). From 1863 to 1913 the US banking system was one
of the best run banking system in the world. But economics is a very, very scary thing and
after banking panics in 1873, 1884, 1893, and 1907, the US knew something needed to
change. During the time from 1863 through 1913 the United States operated without a
central bank, so to ensure the banking system did not fail the US government created the
Federal Reserve System in 1914. The Federal Reserve System or FED was organized as the
central banking system, revolving around 12 regional banks whose job it was to ensure that
the banking system would not collapse. Yet collapse they did, no less than 25 years after the
Feds creation, the US and the world was devastated by the worst economic disaster to strike
in the history of western culture. During the 1930s an estimated 9,000 banks failed with
over 140 billion dollars of assets lost (Genzel). This devastating hit to the United State
economy forced law makers to pass The Glass-Stegall Act. The Glass-Stegall Act is one of
the most important laws in banking that was ever made, it prohibited commercial banks from

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engaging in the investment business. The Glass-Stegall Act brought back confidence into the
American Banking system after it was almost wiped out during the great depression. For the
following 60 years there was no major economic problems, stemming from the banking
system, which effected the United States. Legislators and bank reformers argued that the act
was never necessary, or that it had become outdated and should be repealed (Cintron). So in
1999 the Gramm-Leach-Bilely Act was used to make significant changes to Glass Stegall.
These changes were mostly reflected in repealing Glass-Stegalls restrictions on commercial
banking. These repeals are suspected to have been the cause of the economic collapse in
2009. Through-out history the United States banking system has gone through a variety of
changes. Some for the better, some for the worse but the evolution of todays economy is
more important than ever.
After going over a quick history of the United States banking system, I want to focus
on the effects of the 2009 economic collapse and how they concern us. The repeal of GlassStegall has effect more people than people realize. Many experts believe that commercial
investment banking was a major cause in the economic crisis of 2009. Its believed that
commercial banks saw opportunity to invest in the housing market in order to make easy
money. Because the housing market had been on an incline since the early 1990s many
investors, especially banks, thought it they saturated that market they could not only get
money from rising home prices but also money from increasing interest rates on mortgages
to these homes. When the housing market crashed, many people could not afford to pay the
overpriced mortgage on their homes and went bankrupt. This idea that buying a home would
force you into bankruptcy plummeted the housing market. This caused banks to not only lose

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money because of not receiving interest rates, but there money was sitting in assets that were
not being sold. At the time many investors believe that the big banks, even with such a poor
investment, were too big to be effected. A year after the 2009 recession it was shown that
the top 10 bank holding companies in the United States are reporting $11 trillion dollars in
assets..84 percent of all banking assets are in the hands of the big ten banks (Domhoff).
This is concerning considering it took a 550 billion dollar bailout in order stabilize the
financial sector from collapse one year prior to report.
As of right now there is a huge debate in both politics and finance in whether or not
we should pass a bill created by Senators John McCain and Elizabeth Warren dubbed the
The 21st Century Glass-Steagall Act. The bill would revive two parts of the Banking Act
of 1933, aka Glass Stegall Act, that separated investment banking from commercial banking.
In the forums of a debate site, Simon Johnson, a member of the Peterson Institute for
International Economics, believes that if left unchecked, big banks can cause a huge disaster
in todays economy. He goes on to say The largest U.S. banks are too big to fail, too big to
manage and too big to jail. They have become so large that they threaten stability and
prosperity for the rest of our economy. Others on the same website, do not believe that the
21st Glass-Stegall Act should not be passed. Allan Groody, a president of a financial holding
group, believes that breaking up the big banks would pose to big a risk to todays economy.
Presidential candidate Bernie Sanders recently stated during a speech that he was for the
breaking up big banks. Although he has an alternate approach that senator McCain, senator
Sanders suggests that There are three ways we can break up the banks: 1) Pass a law putting
some sort of cap on the size of the balance sheet of financial companies, usually non-deposit

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liabilities. Caps, such as Senator Browns SAFE Banking Act, are generally proposed around
2 or 3 percent of GDP.
2) Have the council of regulators known as the Financial Stability Oversight Council
(FSOC), on which the Treasury Secretary serves as chair, declare the largest firms to be too
risky and that they must be broken up (Section 121).
3) Have the Federal Reserve, along with the FDIC, determine that the living wills of the
biggest banks, which are plans for how they can fail without bringing down the economy, are
not credible, and thus the banks must be broken up (Section 165d). There are both pros and
cons to all of these possible ways to break up big banks. For example, a pro to Mr. Sanders
first example is that it puts a limit on how much equity a bank can invest, while forcing
banks to keep most of their cash available in case of an emergency. But there are cons to this
as well, if each company is only allowed to use a portion of the equity, it would make it
harder for US banks to expand and innovate.
People such as Mark Thoma of CBS News believe that Interconnectedness is the real
issue with banking in the United States. Interconnectedness is a problem where if one bank
fail, the other banks will fail with them. This has occurred through years of taking and
receiving loans from one another when cash was not readily available. This has created a
problem where multiple banks owe each other money, yet they still borrow from and loan to
other banks.

I really enjoyed reading your paper, it was well thought out and
well prepared. Just look over, re-read for yourself and you should
be fine! Good luck!!