Could The Return Of Glass- Steagall Prevent Wells Fargo-Style Debacles?

Financial Advisor Owings Mills

By Ryan Wibberley, Chief Executive Officer of CIC Wealth

Last month, Wells Fargo was fined $185 million for creating approximately two million bank and credit-card accounts without customers’ consent. Not long after, former employees filed class-action lawsuits claiming workers faced termination if they refused to meet sales goals by creating those fraudulent accounts. What is frightening more is that Wells Fargo may not be the only bank conducting unethical sales to make a buck. Big banks are under increasing pressure to generate earnings, pushing them to look for new avenues to make money in any way possible. The reason banks have been undergoing a lot of pressure is because interest rates remain very low, so they aren’t making the money they used to. The pressure of new and emerging payment systems also has big banks scrambling to catch up. Consumers need ways of transferring money faster and technology has given them the option to do so. It’s also making it possible to conduct a broad range of business activities without involving banks at all. Many legislators say that the Wells Fargo scandal is a sign that big banks are too big to manage and that changes need to be made. Some Democrats favor the reinstatement of the Glass- Steagall law, which separated investment banking from traditional lending. Some blame Glass- Steagall ‘s abolishment for sparking a recession. Personally, I do not believe that the financial crisis was caused by the abolition of Glass- Steagall, but I certainly believe that the abolition was enhanced. Banks should be able to be insured by FDIC or to carry out investment banking operations. If they are insured by FDIC, they should be governed by Glass- Steagall rules. However, this problem will be resolved whenever interest rates inevitably rise because the net interest margin percentages will be higher, causing banks to be more profitable. In the meantime, however, Glass- Steagall ‘s reinstatement would make it more difficult for banks to make money, especially in this low- interest environment. This would put more pressure on Wells Fargo and possibly incentivize more banks to use unethical business practices.