Document Type

Honors Capstone Project

Date of Submission

Spring 5-1-2012

Capstone Advisor

Dr. Christopher Rohlfs, Ph.D.

Honors Reader

Dr. Jeffrey H. Harris, Ph.D.

Capstone Major

Economics

Capstone College

Arts and Science

Audio/Visual Component

no

Capstone Prize Winner

no

Won Capstone Funding

no

Honors Categories

Social Sciences

Subject Categories

Economic History | Economics | Economic Theory | Growth and Development

Abstract

The Great Recession of 2008-2009 was one of the most devastating financial crises of our history. The extent with which the recession plagued our financial system and affected everyday citizens created an immediate search for answers as to what had happened. Many experts pointed at the 1999 repeal of the Banking Act of 1933 (commonly referred to as Glass-Steagall) as a possible cause of increased risk-taking in the financial system. After the Great Depression, Glass-Steagall was enacted to separate commercial banking from investment banking, the combination being seen as a cause for the worst financial crises in history.

With the repeal of this act many argued that with increased international competition and government guarantees on their depositors’ money, banks shifted their risk to riskier securitization instruments that would allow them to increase their profits.

With this paper I study the leverage data of U.S. commercial banks and a control group of selected foreign banks to attempt to see if the repeal of Glass-Steagall may have had an effect on bank risk-taking. By using different measures of leverage as outcome variables I was able to analyze the risk-taking shift after the repeal. The study finds little apparent effect of the repeal on bank leverage data, although the results do imply that there are many outside factors affecting the results. Although the study provides a lack of consistent results, its overall meaning can add to the debate on the role of regulation in our financial system.

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License.

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