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Dems plan big changes to banking

By Claes Bell · Bankrate.com
Thursday, July 28, 2016
Posted: 6 pm ET
Aaron P. Bernstein/Getty Images

Aaron P. Bernstein/Getty Images

Trying to decide whether to vote Democratic this year? Here's what the party has united around when it comes to banking regulation.

It probably comes as no surprise that, in a time of increasing polarization in America, the 2 major parties are far apart when it comes to what to do with the banks.

Even in approach, the Republican platform and the Democratic platform are worlds apart. The Republican platform is mostly a criticism of President Barack Obama's approach to financial regulation in broad strokes that leaves many question marks about specific actions they would take. The Democratic platform is a defense of them, along with a laundry list of specific proposals, few of which are politically feasible, at least in the current landscape.

There is, however, 1 big idea shared by both parties that might surprise you.

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A big change for both parties

Perhaps the biggest news is the overlap between the Democratic platform and the Republican platform. Both agree on a big idea: re-establishing the parts of the 1933 Glass-Steagall Act that built a firewall among different types of financial services.

"On the Republican side, this is an about-face for the party that led the charge to repeal Glass-Steagall" in the first place, says Aaron Klein, a fellow at the Brookings Institution. (Klein worked in the Obama administration as a deputy assistant secretary in the Treasury.)

But it's also a big shift for Democrats, who mostly have been opposed to a return to Glass-Steagall until recently, Klein says.

"On the Democratic side, Secretary Clinton was pretty clear that she didn't want to reinstate Glass-Steagall -- that was Bernie Sanders' position," he says.

What Glass-Steagall was about

Glass-Steagall separated commercial banks, investment banks and brokerages:

  • Commercial banks take deposits and make loans.
  • Investment banks raise money for businesses by issuing stocks and bonds.
  • Brokerages buy and sell stocks for investors.

The law was repealed in the 1999 Gramm-Leach-Bliley Act signed by President Bill Clinton.

Whether Glass-Steagall would actually have done much to prevent the financial crisis is up for debate.

But its presence does speak to a desire for a heavier crackdown on the banks to prevent a repeat of the financial crisis, Klein says.

Klein chalks it up to the "appeal of the Depression-era generation, my grandparents, who had a financial crisis, put something in place, and it worked. And there's a feeling that we've gone away from what worked."

What a lot of Americans probably don't understand is that the way we bank would probably change a lot if the law were to be fully reinstated, Klein says. No institution could offer more than 1 of the main types of financial service. For example, you couldn't have an IRA account with your bank or credit union. You couldn't have a checking account with a brokerage company like Charles Schwab.

And much, much more!

Here are the other proposals in the Democratic platform that would have the biggest effect on banking:

  • Breaking up the big banks: In addition to re-establishing Glass-Steagall, Democrats also say they want to dismantle "too-big-to-fail" banks that are "that pose a systemic risk to the stability of our economy." How broadly that label would be applied remains to be seen, but breaking up the JPMorgan Chases and Wells Fargos of the world would obviously be a pretty big step.
  • Harsher penalties for law-breaking bankers: Democrats say they want to make laws and civil penalties for financial misconduct harsher, and to make sure that when Wall Streeters and the firms that employ them break laws that they'll actually be punished. To do that, they support extending the statute of limitations on major financial crimes and increase funding to watchdogs like the Securities and Exchange Commission.
  • Defend Dodd-Frank: Where the Republican platform was largely concerned with tearing down President Barack Obama's signature banking and financial reform law, Dodd-Frank, the Democrats give a great deal of space to affirming it, pledging to keep the Consumer Financial Protection Bureau's structure as an independent agency led by a single director, in place. That would make a difference for bank customers, thousands of whom have filed complaints against their banks with the CFPB and reached some kind of resolution.
  • Limit regulators' "revolving door": Like previous Democratic platforms, this platform takes aim at the practice of bank regulators moving into jobs in the banking industry and vice versa, which tends to undermine effective bank oversight. It would do that by forcing regulators to "recuse themselves" from working on issues involving their former employees, and by preventing companies from offering "golden parachutes" to workers quitting to take regulatory jobs.
  • A "public option" for banking: Democrats say they want to make the Post Office into a de facto bank. This isn't as crazy as it might sound -- it actually existed in the United States from 1911 until 1967, and many industrialized countries such as France, Korea and Germany still have them. Just don't expect banks, who still have considerable clout in Washington, to let it happen quietly.

What do you think? Which approach to regulating banks and would you prefer?

Follow me on Twitter: @claesbell.

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5 Comments
ABDOURAHAMANE KOULIBALY
August 31, 2016 at 10:02 pm

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Mike Karren
August 23, 2016 at 4:02 pm

I agree with what Danita said about "let true capitalism work", and through how I've heard Donald Trump same something very similar. I would add I don't trust politicians or businessmen, but if I had to choose it would be the later, and for some reason I can't explain, right now, I trust Trump far more than Hillary. I wonder if he could fix the many problems this country has? Or should that read, I wonder how many problems he could fix? After the last 4 years, I hear and agree with his words..."What the hell have you got to loose?" So I say, give Trump a chance!

LEW
August 18, 2016 at 4:54 pm

Danitto Sisco I was thinking the samething!

Cindy Brooks
August 02, 2016 at 4:24 am

Ditto to what Danita Sisco said...

Danita Sisco
August 01, 2016 at 4:32 pm

How come the Republican platform cannot be highlighted like the DemocRAT platform? Your article appears one-sided for the DemocRATS. Maybe it's time to get the DemocRATS big fingers out of the banking industry and let true capitalism work. Oh where oh where is Milton Friedman when you need him...

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