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Iceland finally getting to splitting banks, US is not

by Eric Ferguson on August 6, 2012

Iceland is about to pass a law requiring banks to split their commercial and investment banking into separate businesses, basically an Icelandic Glass-Steagall. The Icelandic banks collapsed first and worst during the financial crisis of 2008. The resistance of the Icelandic banks to new regulations was broken in a way Wall Street never was. That’s why it seemed shocking that Iceland is only just now getting to this pretty obvious measure. That Iceland would re-regulate first makes sense, but taking four years is hard to explain. In the US of course, we still can’t seriously consider putting in sane regulations like in the dark days of the 1990’s. You know, the bad old days when the economy was strong, unemployment was low, and the banking system hadn’t collapsed since the Great Depression.

What’s even more depressing is that Glass-Steagall passed in 1933. Franklin Roosevelt got it done right away after taking office in order to cope with the banking collapse. Establishing the banking regulations we took for granted for the 50 years when we had no crises got done in a very short time, even before the New Deal. We had as big a collapse in 2008, yet it was a hellacious fight to pass Dodd-Frank two years later, and some regulation still can’t be considered, even obvious regulation like keeping investment banks from using government backed deposits in their commercial business to support risky bets.

“We’ve been burned by this, and that’s why we have to look very closely at what we need to do to prevent it happening again,” Economy Minister Steingrimur Sigfusson said in an interview. “Icelanders are more interested in taking greater steps than small steps when it comes to regulating banking.”

His party, the junior member in Prime Minister Johanna Sigurdardottir’s coalition, has submitted a motion to parliament to stop banks using state-backed deposits to finance risky investments. The move puts Iceland on course to become the first Western nation since the global financial crisis hit five years ago to force banking conglomerates to split their business.

It’s a proposal that’s gaining traction elsewhere. Even Sandy Weill, whose 1998 creation of New York-based Citigroup triggered the Gramm-Leach-Bliley Act that paved the way for financial behemoths, now says investment banks should be separated from deposit-taking banks. Opponents including JPMorgan Chase & Co. Chief Executive Jamie Dimon say diverse businesses are needed to spread risk across divisions and stay competitive.

The Icelandic lawmaker who presented the motion, Alfheidur Ingadottir, says the best way to stop banks creating asset bubbles is to pass laws akin to the 1933 Glass-Steagall Act, which separated commercial and investment banking in the U.S. for more than six decades.

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