What is the Financial Services Modernization Act?

Also called the Gramm-Leach-Bliley Act, the Financial Services Modernization Act was an act of the 106th U.S. Congress that was signed into law on 12 November 1999. The Financial Services Modernization Act repealed part of the Glass-Steagall Act of 1933, which prohibited banks from offering investment, commercial banking and insurance services.

The Financial Services Modernization Act opened up competition among banks, securities companies and insurance companies by allowing commercial and investment banks to consolidate. These mergers created the financial services industry. The banking industry had succeeded in weakening the Glass-Steagall Act, which they had pushed for the repeal of since the 1980s, so that some combinations of financial services were occurring prior to the legislation.

At the time of the legislation, the banking industry, brokerages and insurance companies generally supported it. Their argument was that allowing consumers to perform all their banking, investment and other financial business at the same location was a “win-win” situation for the consumer as well as for financial institutions. The law would be good for consumers because they would have more convenient and broader services to choose from. It would be good for financial institutions because it would insulate them from the ways people tend to move their money back and forth between savings and investments according to how the economy is doing.

The Financial Services Modernization Act preserved some restrictions on mergers and acquisitions among financial services companies. The institution must have a satisfactory rating from the Community Reinvestment Act, which monitors fair lending practices. Also, financial companies cannot own non-financial companies, and vice versa. Non-financial companies, such as Wal-Mart, for example, cannot operate banks.

The Financial Services Modernization Act is implicated by some economists and experts, including President Obama, in directly causing the 2007 subprime mortgage crisis. It has been criticized as “corporate welfare” for financial institutions. Defenders of the act say that without it, it would have been harder to bring about some of the mergers and sales orchestrated in response to the current financial crisis.