Glass-Steagall Act

Definition

The Glass-Steagall Act refers to sections of the U.S. Banking Act of 1933 that mandated a strict separation between commercial banking and investment banking activities.

Its objective was to reduce systemic risk, prevent conflicts of interest, and restore public confidence in the financial system following the Great Depression.

For decades, Glass-Steagall shaped the structure of U.S. banking by limiting the ability of commercial banks to engage in securities underwriting, brokerage, and other high-risk capital market activities.

In AML/CFT contexts, although the Act was not explicitly designed as an anti-financial crime measure, its structural separation indirectly influenced risk mitigation by limiting the complexity and interconnectedness of financial institutions.

The repeal of key Glass-Steagall provisions in 1999 is widely cited as contributing to increased financial sector integration, potentially expanding vulnerabilities to fraud, illicit finance, and money laundering within large universal banks.

Explanation

The Glass-Steagall Act emerged in response to widespread bank failures and securities market abuses in the early 1930s.

Investigations revealed that combined banks, offering both deposit-taking and investment services, had engaged in speculative investments using depositor funds, manipulated markets, and facilitated risky securities issuance.

To restore stability, the U.S. government introduced a framework emphasising:

• Structural separation of banking functions,
• Depositor protection through the introduction of the FDIC,
• Restrictions designed to reduce excessive risk-taking.

Glass-Steagall provisions remained central to U.S. banking regulation for over six decades.

However, by the late 20th century, financial institutions lobbied for more flexibility, arguing that competition, globalisation, and financial innovation had rendered the Act outdated.

The Gramm–Leach–Bliley Act (GLBA) of 1999 repealed several core components, enabling mergers between commercial banks, investment banks, and insurance companies.

This shift significantly changed the U.S. financial landscape, giving rise to universal banking models.

From an AML/CFT perspective, Glass-Steagall’s historical relevance lies in its risk-containment function.

Banks restricted to limited activities were inherently simpler to monitor, audit, and regulate.

Once the separation was removed, institutions gained broader market access but also faced increased exposure to financial crime risks, complex products, cross-border flows, and integrated capital markets.

Glass-Steagall Act in AML/CFT Frameworks

The Glass-Steagall Act does not directly form part of modern AML/CFT laws, but its legacy influences risk assessment and governance approaches in today’s financial institutions.

Key intersections include:

Risk Segmentation

Banks with narrow business mandates generally present lower inherent AML/CFT risk levels.

Under Glass-Steagall, this segmentation was structurally enforced.

Even though the Act is no longer active, its principles inform:

• Customer and product risk classification,
• Assessment of business-line exposure to illicit finance,
• Internal boundary controls separating high-risk functions.

Internal Controls and Chinese Walls

Glass-Steagall set a precedent for maintaining internal separation between functions.

Modern AML frameworks often require similar boundaries, including:

• Segregation between sales, trading, and client onboarding,
• Controlled information sharing,
• Prevention of conflict-driven behaviours that may conceal AML risks.

Governance and Oversight

Complex, multi-service institutions formed after the repeal of Glass-Steagall require stronger AML/CFT oversight due to their broader product mix.

Governance expectations include:

• Clear delineation of responsibilities,
• Risk-based monitoring across business lines,
• Enhanced board-level awareness of financial crime threats.

Market Conduct and Financial Crime Typologies

The combination of commercial and investment services increases exposure to typologies such as:

• Market manipulation,
• Insider trading,
• Securities fraud,
• Complex layering through structured products,
• Misuse of investment vehicles for laundering schemes.

Glass-Steagall’s structural constraints previously limited these overlaps.

Key Components of the Glass-Steagall Act

The Act introduced several foundational measures. Significant components included:

Separation of Banking Activities

Commercial banks could not underwrite or deal in securities beyond limited government-backed instruments.

Investment banks could not accept deposits.

This reduced:

• Potential conflicts of interest,
• Speculative use of depositor funds,
• Opportunities for concealed cross-business transactions.

Creation of the Federal Deposit Insurance Corporation (FDIC)

The FDIC provided deposit insurance, restoring confidence in banking stability by:

• Protecting depositors from bank failures,
• Reducing bank-run risks,
• Enhancing oversight of insured institutions.

Restrictions on Bank Affiliations

Banks were prohibited from maintaining affiliations with securities firms.

This meant:

• No joint ownership structures,
• Limited ability to share customers or operations,
• Reduced systemic interconnectedness.

Regulatory Oversight Enhancements

The Act expanded supervisory authority for regulators, introducing:

• Stricter audits,
• Tighter reporting obligations,
• Prohibitions on risky securities activities.

Examples of Glass-Steagall–Related Scenarios

Restricted Securities Underwriting

Before 1999, a commercial bank could not underwrite corporate securities.

If a client sought investment banking services, the institution had to refer them externally, reducing integrated risk exposure.

Bank Holding Company Limitations

A bank holding company could not control a subsidiary that engaged in securities dealing.

This prevented conglomerates from developing complex structures that might obscure financial crime risks.

Post-Repeal Universal Banking Growth

After the repeal, major institutions formed large financial conglomerates offering deposits, investments, and insurance.

These expansions increased AML/CFT burden due to:

• Broader transaction types,
• Cross-jurisdictional flows,
• Higher exposure to market-driven crime.

Heightened AML Monitoring Requirements

Universal banks resulting from repeal must monitor far more complex activity, including:

• Structured derivatives,
• Cross-border securities settlement,
• Multiple delivery channels,
• Institutional flows requiring robust risk assessment.

Impact on Financial Institutions

Expanded Risk Exposure

Repeal enabled banks to operate across diverse markets, increasing exposure to:

• Securities fraud,
• Market abuse,
• Layering through investment vehicles.

Enhanced AML/CFT Responsibilities

Integrated financial services demand sophisticated controls. Institutions must implement:

• Advanced transaction monitoring engines,
• Cross-line customer risk scoring,
• Multi-service KYC integration.

Competitive Growth Opportunities

Universal banks could offer bundled solutions, increasing revenue but also requiring:

• Stronger governance,
• Higher operational discipline,
• More robust compliance frameworks.

Operational Complexity

Larger institutions face challenges integrating:

• Data systems,
• Compliance processes,
• Multiple regulatory regimes.

This complexity elevates operational and AML/CFT risk.

Supervisory Scrutiny

Regulators impose heightened expectations on universal banks, including:

• Independent audit functions,
• Stress testing,
• Enhanced reporting obligations.

Challenges in Managing Financial Crime Risk Post-Glass-Steagall

Complex Product Structures

Financial innovation has introduced products that complicate AML/CFT detection, such as:

• Structured notes,
• Synthetic instruments,
• Securities lending.

Cross-Border Fragmentation

Universal banks operate globally, facing:

• Inconsistent AML regulations,
• Jurisdictional gaps,
• Varied supervisory capabilities.

Interconnected Financial Ecosystem

Large banks interact with multiple markets, exposing them to risks such as:

• Global sanctions evasion,
• Proliferation financing,
• Transnational fraud networks.

Data Management Limitations

Complex operations generate massive data volumes.

Challenges include:

• Incomplete integration across platforms,
• Data quality issues,
• Delayed detection of cross-line anomalies.

Conflicts of Interest and Internal Leak Points

Without strong controls, universal banks may face internal vulnerabilities, including:

• Information misuse,
• Poor internal separation,
• Insider-enabled misconduct.

Regulatory Oversight & Governance

Federal Reserve

The Federal Reserve supervises bank holding companies and applies prudential regulation across both commercial and investment activities when integrated.

Federal Deposit Insurance Corporation (FDIC)

The FDIC remains responsible for the safety of insured deposits and evaluates financial crime risks within insured banks.

Securities and Exchange Commission (SEC)

The SEC supervises securities activities, ensuring that investment services comply with market conduct rules.

Financial Crimes Enforcement Network (FinCEN)

FinCEN oversees AML obligations under the Bank Secrecy Act (BSA), requiring:

• Suspicious activity reporting,
• KYC compliance,
• Recordkeeping and monitoring.

International Supervisory Bodies

Global standards from organisations such as the Basel Committee and FATF influence risk controls within universal banks operating internationally.

Importance of Glass-Steagall Concepts in AML/CFT Controls

Although largely repealed, the principles behind Glass-Steagall remain valuable for modern AML/CFT frameworks.

The Act highlighted the importance of structural safeguards, transparency, and focused risk management within financial institutions.

Today’s universal banks face far more complex risk environments, making its underlying concepts essential.

Institutions that integrate these principles benefit from:

• Reduced internal conflicts of interest,
• Stronger control of high-risk activities,
• Clearer segregation of duties,
• Improved visibility into cross-business financial flows,
• Enhanced governance and oversight capacity.

Modern financial crime threats, from complex laundering networks to sanctioned entity financing, require robust structural safeguards.

By applying intelligence-led, risk-based architectural approaches such as IDYC360’s intelligence-first AML model, institutions can maintain the protective discipline historically associated with Glass-Steagall while embracing modern financial innovation.

Related Terms

• Financial Regulation
• Universal Banking
• Bank Holding Company
• Securities Underwriting
• Prudential Oversight
• Risk Segmentation
• Bank Secrecy Act

References

• Federal Reserve History – Banking Act of 1933
• U.S. Federal Reserve – Banking Legislation
• U.S. Securities and Exchange Commission – Historical Market Regulation Materials
• Gramm–Leach–Bliley Act Summary – U.S. FTC

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