WASHINGTON -- A bipartisan group of four senators that includes Elizabeth Warren (D-Mass.) and John McCain (R-Ariz.) introduced an updated version of the landmark Glass-Steagall Act on Thursday, aimed at reining in risk at America's largest Wall Street banks.
The legislation is unlikely to be signed into law, but underscores a deepening rift between the House and Senate over financial accountability. While bipartisan coalitions in the House have been moving legislation to deregulate swaps -- the complex financial products at the heart of the 2008 banking collapse -- a host of Senate bills cracking down on Wall Street risk have garnered Democratic and GOP support.
The new bill, which is also cosponsored by Sens. Maria Cantwell (D-Wash.) and Angus King (I-Maine), would require banks that accept federally insured deposits to focus on traditional lending and would bar them from engaging in risky securities trading. The separation between lending and trading was originally imposed in 1933 by the Glass-Steagall Act. Cantwell and McCain previously introduced the plan as an amendment to the 2010 Dodd-Frank financial reform bill, but the largely symbolic bill was never approved. The legislation introduced today would also bar banks that accept insured deposits from dealing swaps or operating hedge funds and private equity enterprises.
"Since core provisions of the Glass-Steagall Act were repealed in 1999, shattering the wall dividing commercial banks and investment banks, a culture of dangerous greed and excessive risk-taking has taken root in the banking world," McCain said in a written statement. "Big Wall Street institutions should be free to engage in transactions with significant risk, but not with federally insured deposits."
McCain voted for the 1999 Gramm-Leach-Bliley Act, which repealed Glass-Steagall. He also named one of that bill's authors, former Sen. Phil Gramm (R-Texas), an economic adviser to his 2008 presidential campaign.
Dodd-Frank attempted to rein in taxpayer-backed Wall Street speculation with the Volcker Rule, which barred banks that accept deposit insurance from placing securities and derivatives bets for their own accounts. But the Volcker Rule has not been finalized by regulators after nearly three years, and regulatory agencies have proposed a rule hundreds of pages long with a lengthy series of loopholes and exemptions. Forcing banks out of the securities business altogether would eliminate the regulatory wrangling over what types of trades violate the Volcker Rule.
Most federal regulators are opposed to reinstating Glass-Steagall, which would force big banks to spin off hundreds of billions of dollars worth of business into independent firms.
"Despite the progress we've made since 2008, the biggest banks continue to threaten the economy," Warren said in a written statement. "The four biggest banks are now 30 percent larger than they were just five years ago, and they have continued to engage in dangerous, high-risk practices that could once again put our economy at risk."
The legislation follows legislation from Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) that would require big banks to hold significantly more capital as a cushion against losses, limiting the amount of debt-financed activity that banks could engage in. The bill would strongly encourage five of the six largest U.S. banks to break up into two or three smaller entities to avoid the strict new rules.