21st Century Glass Steagall

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    AYO13481 S.L.C.

    113 TH CONGRESS1ST SESSION S.

    ll To reduce risks to the financial system by limiting banks ability to engagein certain risky activities and limiting conflicts of interest, to reinstatecertain Glass-Steagall Act protections that were repealed by the Gramm-Leach-Bliley Act, and for other purposes.

    IN THE SENATE OF THE UNITED STATES

    llllllllll Ms. W ARREN (for herself, Mr. M CC AIN , Ms. C ANTWELL , and Mr. K ING ) intro-

    duced the following bill; which was read twice and referred to the Com-mittee on llllllllll

    A BILL

    To reduce risks to the financial system by limiting banksability to engage in certain risky activities and limiting conflicts of interest, to reinstate certain Glass-Steagall

    Act protections that were repealed by the Gramm-Leach-Bliley Act, and for other purposes.

    Be it enacted by the Senate and House of Representa-1

    tives of the United States of America in Congress assembled,2

    SECTION 1. SHORT TITLE.3

    This Act may be cited as the 21st Century Glass-4

    Steagall Act of 2013.5

    SEC. 2. FINDINGS AND PURPOSE.6

    (a) F INDINGS .Congress finds that7

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    AYO13481 S.L.C.

    (1) in response to a financial crisis and the en-1

    suing Great Depression, Congress enacted the Bank-2

    ing Act of 1933, known as the Glass-Steagall Act,3

    to prohibit commercial banks from offering invest-4

    ment banking and insurance services;5

    (2) a series of deregulatory decisions by the6

    Board of Governors of the Federal Reserve System7

    and the Office of the Comptroller of the Currency,8

    in addition to decisions by Federal courts, permitted9

    commercial banks to engage in an increasing num-10

    ber of risky financial activities that had previously 11

    been restricted under the Glass-Steagall Act, and12

    also vastly expanded the meaning of the business of 13

    banking and closely related activities in banking 14

    law;15

    (3) in 1999, Congress enacted the Gramm-16

    Leach-Bliley Act, which repealed the Glass-Steagall17

    Act separation between commercial and investment18

    banking and allowed for complex cross-subsidies and19

    interconnections between commercial and investment20

    banks;21

    (4) former Kansas City Federal Reserve Presi-22

    dent Thomas Hoenig observed that with the elimi-23

    nation of Glass-Steagall, the largest institutions with24

    the greatest ability to leverage their balance sheets25

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    AYO13481 S.L.C.

    increased their risk profile by getting into trading,1

    market making, and hedge fund activities, adding 2

    ever greater complexity to their balance sheets.;3

    (5) the Financial Crisis Inquiry Report issued4

    by the Financial Crisis Inquiry Commission con-5

    cluded that, in the years between the passage of 6

    Gramm-Leach Bliley and the global financial crisis,7

    regulation and supervision of traditional banking 8

    had been weakened significantly, allowing commer-9

    cial banks and thrifts to operate with fewer con-10

    straints and to engage in a wider range of financial11

    activities, including activities in the shadow banking 12

    system. The Commission also concluded that13

    [t]his deregulation made the financial system espe-14

    cially vulnerable to the financial crisis and exacer-15

    bated its effects.;16

    (6) a report by the Financial Stability Over-17

    sight Council pursuant to section 123 of the Dodd-18

    Frank Wall Street Reform and Consumer Protection19

    Act states that increased complexity and diversity of 20

    financial activities at financial institutions may 21

    shift institutions towards more risk-taking, increase22

    the level of interconnectedness among financial23

    firms, and therefore may increase systemic default24

    risk. These potential costs may be exacerbated in25

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    AYO13481 S.L.C.

    cases where the market perceives diverse and com-1

    plex financial institutions as too big to fail, which2

    may lead to excessive risk taking and concerns about3

    moral hazard.;4

    (7) the Senate Permanent Subcommittee on In-5

    vestigations report, Wall Street and the Financial6

    Crisis: Anatomy of a Financial Collapse, states that7

    repeal of Glass-Steagall made it more difficult for8

    regulators to distinguish between activities intended9

    to benefit customers versus the financial institution10

    itself. The expanded set of financial services invest-11

    ment banks were allowed to offer also contributed to12

    the multiple and significant conflicts of interest that13

    arose between some investment banks and their cli-14

    ents during the financial crisis.;15

    (8) the Senate Permanent Subcommittee on In-16

    vestigations report, JPMorgan Chase Whale17

    Trades: A Case History of Derivatives Risks and18

    Abuses, describes how traders at JPMorgan Chase19

    made risky bets using excess deposits that were20

    partly insured by the Federal Government;21

    (9) in Europe, the Vickers Independent Com-22

    mission on Banking (for the United Kingdom) and23

    the Liikanen Report (for the Euro area) have both24

    found that there is no inherent reason to bundle re-25

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    AYO13481 S.L.C.

    tail banking with investment banking or other1

    forms of relatively high risk securities trading, and2

    European countries are set on a path of separating 3

    various activities that are currently bundled together4

    in the business of banking;5

    (10) private sector actors prefer having access6

    to underpriced public sector insurance, whether ex-7

    plicit (for insured deposits) or implicit (for too big 8

    to fail financial institutions), to subsidize dan-9

    gerous levels of risk-taking, which, from a broader10

    social perspective, is not an advantageous arrange-11

    ment; and12

    (11) the financial crisis, and the regulatory re-13

    sponse to the crisis, has led to more mergers be-14

    tween financial institutions, creating greater finan-15

    cial sector consolidation and increasing the domi-16

    nance of a few large, complex financial institutions17

    that are generally considered to be too big to fail,18

    and therefore are perceived by the markets as hav-19

    ing an implicit guarantee from the Federal Govern-20

    ment to bail them out in the event of their failure.21

    (b) P URPOSE .The purposes of this Act are22

    (1) to reduce risks to the financial system by 23

    limiting banks ability to engage in activities other24

    than socially valuable core banking activities;25

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    (2) to protect taxpayers and reduce moral haz-1

    ard by removing explicit and implicit government2

    guarantees for high-risk activities outside of the core3

    business of banking; and4

    (3) to eliminate conflicts of interest that arise5

    from banks engaging in activities from which their6

    profits are earned at the expense of their customers7

    or clients.8

    SEC. 3. SAFE AND SOUND BANKING.9

    (a) I NSURED DEPOSITORY INSTITUTIONS .Section10

    18(s) of the Federal Deposit Insurance Act (12 U.S.C.11

    1828(s)) is amended by adding at the end the following:12

    (6) L IMITATIONS ON BANKING AFFILI -13

    ATIONS .14

    (A) P ROHIBITION ON AFFILIATIONS WITH 15

    NONDEPOSITORY ENTITIES .An insured depos-16

    itory institution may not17

    (i) be or become an affiliate of any 18

    insurance company, securities entity, or19

    swaps entity;20

    (ii) be in common ownership or con-21

    trol with any insurance company, securities22

    entity, or swaps entity; or23

    (iii) engage in any activity that24

    would cause the insured depository institu-25

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    tion to qualify as an insurance company,1

    securities entity, or swaps entity.2

    (B) I NDIVIDUALS ELIGIBLE TO SERVE ON 3

    BOARDS OF DEPOSITORY INSTITUTIONS .4

    (i) I N GENERAL .An individual who5

    is an officer, director, partner, or employee6

    of any securities entity, insurance com-7

    pany, or swaps entity may not serve at the8

    same time as an officer, director, employee,9

    or other institution-affiliated party of any 10

    insured depository institution.11

    (ii) E XCEPTION .Clause (i) does not12

    apply with respect to service by any indi-13

    vidual which is otherwise prohibited under14

    clause (i), if the appropriate Federal bank-15

    ing agency determines, by regulation with16

    respect to a limited number of cases, that17

    service by such an individual as an officer,18

    director, employee, or other institution-af-19

    filiated party of an insured depository in-20

    stitution would not unduly influence the in-21

    vestment policies of the depository institu-22

    tion or the advice that the institution pro-23

    vides to customers.24

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    (iii) T ERMINATION OF SERVICE .1

    Subject to a determination under clause2

    (i), any individual described in clause (i)3

    who, as of the date

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