Analysis
After the devastating U.S. stock market crash of 1929, the United States introduced the Glass-Steagall Act in 1933 to prevent it from ever happening again. The law separated the activities of retail and investment banks, drawing a hard line between customer deposits and speculative trading activity in the markets. This separation, coupled with the constraints imposed by the Bretton Woods system that emerged after World War II, resulted in a long period uninterrupted by major financial shocks.
But international flows of capital loosened once again in the 1970s with the end of the Bretton Woods system. The creation of the eurodollar market in London in the 1960s also helped remove constraints on capital movement, increasing cross-Atlantic money flows and transforming London into an important financial hub. Since then, the financial cycle has become more pronounced in the United States, with higher highs and lower lows.
In the 1980s, the London financial sector was rapidly deregulated in what came to be known as the Big Bang, and in 1997 the Glass-Steagall Act was repealed in the United States. Though the hard boundaries between retail and investment banks had been steadily weakening, this was a direct attempt to dismantle the institutions and regulations separating the two. Speculative capital flows, particularly between U.S. and European investment banks, rapidly increased, creating a bubble based on inflated prices. When the bubble burst, loans that had been made on the basis of inflated asset prices suddenly became worthless, and banks found themselves in danger of insolvency.
Governments, which had had little choice but to use public money to bail out various financial and non-financial institutions, once again moved to enact regulations that would prevent a repeat. The Dodd-Frank Act, which came into force in the United States in 2010, once again imposed limits on bank activities. In addition, a campaign of fines has been levied upon large banks on both sides of the Atlantic. The recent tumult at Deutsche Bank was triggered by the proposed imposition of a $14 billion fine by the U.S. Department of Justice.
