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Senate of Pennsylvania
Session of 2017 - 2018 Regular Session

MEMORANDUM

Posted:	March 15, 2017 12:54 PM
From:	Senator Mike Folmer
To:	All Senate members
Subject:	Reintroduction of Glass-Steagall Act Resolution

President Trump recently issued an executive order directing the Treasury Secretary to report on what laws and rules promote or inhibit financial regulations. This directive has led to talk about possible changes to the Dodd–Frank Wall Street Reform and Consumer Protection Act. For this reason, I plan to reintroduce my Senate Resolution 411 from last Session, which calls upon Congress to reinstate the provisions of the Glass-Steagall Act in place of Dodd-Frank. Previous cosponsors were Dinniman, Hutchinson, and Mensch. After the stock market crash of 1929 and the Great Depression of the 1930s, several laws were passed to protect the American economy. Glass-Steagall was a key safeguard for over 60 years as it restricted both relatively low-risk traditional commercial banking and higher-risk investment banking. During that time, the United States had the highest rate of economic growth in its history and the lowest rate of financial crashes. In 1999, Glass-Steagall was replaced by the Gramm-Leach-Bilely Act, which removed a number of investment restrictions on banks. Combined with government housing policies, many bank loans became subprime or otherwise low quality. By 2008, roughly 58% of all US mortgages fell into this category and when the housing bubble burst, mortgage defaults soared to unprecedented levels, causing a worldwide financial crisis. Congress responded in 2010 with passage of the 2,300-page Dodd-Frank Act, which imposed vast new regulations on banks: approximately 24,000 pages of new regulation. Unfortunately, Dodd-Frank has not stemmed the fiscal woes as many banks have become more fragile, funding themselves with short-term, often overnight, money that makes them vulnerable to runs. A University of Maryland study found due to Dodd-Frank, “lenders reduced credit to middle-class households by 15%, and increased credit to wealthy households by 21%.” Meanwhile, many smaller banks were forced to hire compliance officers to follow the complex and costly regulations of Dodd-Frank – instead of hiring lending officers. More than 1,700 small and community banks – nearly one quarter of the industry – have been forced to merge or close. Despite these so-called “protections”, cities, states, and nations across the world face financial crises. Puerto Rico defaulted on debt payments and confronted bankruptcy. As Congress struggled with these issues, former Treasury Secretary Jacob Lew warned another “taxpayer-funded bailout may become the only legislative course available”. Title II of Dodd-Frank calls for the "orderly resolution" of “too big to fail” measures – including giving super priority status to the most speculative bank holdings (i.e., “derivatives” or “swaps”) above all other obligations. This allows the FDIC to use taxpayer money to initiate a bail-out into a "bridge" bank. Dodd-Frank designates all bank holding companies with consolidated assets of more than $50 billion as “too big to fail”. Additionally, while deposits are protected up to $250,000, these protections are limited to the extent the FDIC has money to cover claims. However, just two of the “too big to fail” banks have book values of more than $1 Trillion, which exceeds the world GDP. The five biggest banks control 44% of all U.S. banking assets – more than before Dodd-Frank was enacted. Dodd-Frank would allow depositor investments to be turned into bank equity – a “bail in”: allowing depositors’ moneys above the FDIC $250,000 guarantee to be used as “uninsured" loans. This “bail in” mechanism was used at the end of 2015 in Italy by four banks and more than 130,000 investors (average citizens and small businesses) lost most if not all of their investments. Protests were held and at least one investor committed suicide. I believe my Resolution protects the American middle-class by urging Congress to again separate commercial and investment banking by repealing Dodd-Frank and getting back to the Glass-Steagall Act of 1933. I hope you will consider cosponsoring this important measure.

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