Using 'Firewalls' in a Post Glass-Steagall Banking Environment

Pursuant to a congressional request, GAO discussed the use of "firewalls," legal and regulatory measures that separate a company's banking and nonbanking activities, in the event of repeal or relaxation of the Banking Act of 1933. GAO noted that firewalls protect bank safety and prevent conflict-of-interest abuses by promoting: (1) legal separation so that banks are not legally liable for their affiliates' debts; (2) economic separation that prohibits banks from excessively aiding their affiliates; and (3) psychological separation that keeps the public from perceiving banks and their affiliates as one entity. GAO also noted that, since no insulation strategy is fail-safe, attempts to construct firewalls must consider the: (1) benefits of such strategies against the potential reduction of benefits from regulation repeal or relaxation; and (2) use of firewalls in combination with other legal and regulatory mechanisms to encourage sound and safe bank operation. GAO believes that, if Congress repeals or relaxes the Banking Act of 1933, it should construct firewalls which: (1) require holding companies to act as a source of strength for their banking activities; (2) prohibit under-capitalized holding companies from engaging in expanded activities; and (3) increase regulatory resources and expertise to ensure compliance with laws and regulations.