What Did the Glass-Steagall Act Do and What Still Applies?

The Glass-Steagall Act, formally the Banking Act of 1933, did four things: it separated commercial banking from investment banking, created the Federal Deposit Insurance Corporation, capped the interest banks could pay on deposits, and prohibited banks from sharing owners or leadership with securities firms. Two of those four pillars were repealed by the Gramm-Leach-Bliley Act in 1999, and the interest-rate caps disappeared by 2011, but the activity separation and federal deposit insurance remain federal law and still shape how American banks operate. Congress passed the law on June 16, 1933, after roughly 9,000 banks had collapsed during the Great Depression and wiped out some $7 billion in depositor savings.¹²

The Wall Between Commercial and Investment Banking

Before 1933, a single bank could take your savings on Monday and use it to underwrite a stock offering on Tuesday. Lawmakers treated that mixing as a core cause of the crash: banks had funneled depositor money into speculative securities, and when the deals soured, savers lost everything.

Glass-Steagall answered with two complementary rules. Section 16 told commercial banks (the institutions holding checking and savings accounts) that they could no longer underwrite or deal in stocks, bonds, or other securities. A bank could still buy and sell securities on a customer’s behalf as an agent, but it could not trade for its own profit or put its name behind a new stock offering.³ Section 21 flipped the rule the other way: any firm dealing in securities was barred from accepting deposits.⁴

The penalties were criminal. A willful violation of Section 21 carried a fine of up to $5,000, up to five years in prison, or both, and officers, directors, and employees who knowingly participated faced the same punishment.⁴ In 1933 dollars, that was serious money, and prison time signaled that Congress saw the mixing of deposits and securities as genuinely dangerous.

Section 16 did leave banks a safe-harbor list of investments they could hold for their own account: U.S. government bonds, general obligations of states and municipalities, and debt issued by federally backed entities such as the Federal Home Loan Banks, Fannie Mae, Ginnie Mae, and the Tennessee Valley Authority.³ A bank holding Treasury bonds is doing something different from a bank underwriting a startup’s shares. The first preserves depositor capital; the second bets it.

Federal Deposit Insurance

Before 1933, a bank failure meant you lost your money. No backstop, no insurance fund, nothing. Rumors about a bank’s health drew lines of customers to the teller windows, and those withdrawals usually finished off whatever chance the bank had of surviving. Individual failures became system-wide panics.

Glass-Steagall broke that cycle by creating the FDIC. A temporary insurance fund launched on January 1, 1934, covering deposits up to $2,500 per depositor. By July 1934 the fund became permanent and the limit rose to $5,000.⁵¹ Banks funded the insurance by paying assessments into a shared pool based on the size of their deposits. The FDIC also gained authority to monitor troubled banks and arrange mergers with healthier institutions before a full collapse.

The psychological effect mattered as much as the money. Once depositors knew the federal government stood behind their accounts, the incentive to run disappeared, and bank runs became rare almost overnight.

How FDIC Coverage Works Now

The original $2,500 limit has been raised many times. The standard today is $250,000 per depositor, per FDIC-insured bank, for each ownership category. Retirement accounts like IRAs count as a separate ownership category, so a person with both a regular savings account and an IRA at the same bank could have up to $500,000 in combined coverage.⁶

One boundary worth knowing: the FDIC does not cover investment products, even when you buy them at an insured bank. Stocks, bonds, mutual funds, annuities, crypto assets, and life insurance policies all sit outside FDIC protection.⁷ That line traces directly to the Glass-Steagall philosophy: deposits are one thing, securities are another, and the safety net covers only the first.

Interest Rate Caps Under Regulation Q

Glass-Steagall also targeted a quieter problem: destructive competition for deposits. In the years before the crash, banks had bid up interest rates on savings accounts to pull in more money, then chased risky, high-return investments to cover the payouts.

The Act attacked this on two fronts. It directed the Federal Reserve to cap the interest banks could offer on savings and time deposits, which the Fed did through Regulation Q, first published in September 1933. It also banned any payment of interest on demand deposits (ordinary checking accounts). Smaller banks around the country had been parking excess funds as demand deposits at large New York City banks and collecting interest on the balances, which lawmakers viewed as a destabilizing flow of money toward speculative hubs.⁸

These controls held for decades and then fell away. The prohibition on interest-bearing checking accounts was fully repealed on July 21, 2011, when Section 627 of the Dodd-Frank Act struck the underlying provision from the Federal Reserve Act.⁹ That is why banks can now offer interest on business checking accounts, which would have been illegal for most of the twentieth century.

Restrictions on Affiliations and Shared Leadership

Separating the two kinds of business was not enough if the same people or the same corporate parents controlled both sides of the wall. Sections 20 and 32 addressed that.

Section 32 barred any officer, director, or employee of a securities firm from simultaneously serving in the same role at a Federal Reserve member bank. If the same person sat on both boards, the wall was decorative.¹⁰ Section 20 targeted corporate structure. A member bank could not affiliate with any company whose primary business was underwriting or distributing securities. No shared ownership, no parent-subsidiary relationship, no holding company arrangement that put a banking operation and a securities operation under the same corporate umbrella. A member bank that violated the affiliation ban faced civil penalties of up to $1,000 for each day the violation continued.¹¹

What the Gramm-Leach-Bliley Act Repealed in 1999

By the 1990s, the industry had spent decades chipping away at the affiliation rules through regulatory reinterpretations and lobbying. The Gramm-Leach-Bliley Act, signed on November 12, 1999, finished the job by repealing Sections 20 and 32. Sections 16 and 21, the core bans on banks directly underwriting securities and on securities firms accepting deposits, were left intact.

The practical result was a new corporate form: the financial holding company. A single parent could now own a commercial bank, a securities firm, and an insurance company as separate subsidiaries. The subsidiaries themselves still faced the old activity restrictions, but the holding company could span all three sectors.¹² Firms like Citigroup, which had already merged banking and insurance operations in anticipation of the law, became the model.

What Still Applies Today

Sections 16 and 21 are still on the books. A commercial bank still cannot underwrite a stock offering. A brokerage firm still cannot accept checking deposits. Those prohibitions apply to the institutions themselves, not to their corporate parents, which is why your bank and your brokerage can share a logo and a website while operating as separate legal entities under a financial holding company.³⁴

The FDIC is very much alive. It insures deposits at more than 4,000 banks and has only grown in scope since 1933. The penalty schedule for banking violations has also been modernized far beyond Glass-Steagall’s original fines. Under current law, a first-tier civil penalty can reach $5,000 per day, a second-tier penalty for patterns of misconduct can reach $25,000 per day, and a third-tier penalty for knowing violations that cause substantial losses can run up to $1,000,000 per day.¹³

The Volcker Rule

After the 2008 crisis, Congress revived the argument that banks needed tighter limits on speculative trading, but it did not reinstate Glass-Steagall. Instead, the Dodd-Frank Act of 2010 added the Volcker Rule, which prohibits banking entities from proprietary trading (buying and selling financial instruments for the bank’s own profit rather than on a customer’s behalf) and bars banks from owning or sponsoring hedge funds and private equity funds.¹⁴

The Volcker Rule carries exceptions Glass-Steagall did not. Banks can still trade government bonds and municipal securities, provide market-making services for clients, and hedge specific risks to the bank itself.¹⁴ The result is a more nuanced set of restrictions than the bright-line rules Glass-Steagall drew, and the principle behind both is the same one Congress established in 1933: institutions holding ordinary people’s savings should not be in the business of speculating with them.

1
FDIC. Historical Timeline
2
Social Security Administration. Bank Failures During the Great Depression
3
Office of the Law Revision Counsel. 12 USC 24 – Corporate Powers of Associations
4
Office of the Law Revision Counsel. 12 USC 378 – Dealers in Securities Engaging in Banking Business
5
Federal Reserve History. Banking Act of 1933 (Glass-Steagall)
6
FDIC. Understanding Deposit Insurance
7
FDIC. Financial Products That Are Not Insured by the FDIC
8
Federal Reserve History. Interest Rate Controls (Regulation Q)
9
Federal Register. Prohibition Against Payment of Interest on Demand Deposits
10
eCFR. 12 CFR Part 250 – Interpretations of Section 32 of the Glass-Steagall Act
11
Justia Law. 12 USC 377 – Affiliation with Organization Dealing in Securities
12
Federal Reserve History. Financial Services Modernization Act of 1999 (Gramm-Leach-Bliley)
13
Office of the Law Revision Counsel. 12 USC 504 – Civil Money Penalty
14
Office of the Law Revision Counsel. 12 USC 1851 – Prohibitions on Proprietary Trading and Certain Relationships with Hedge Funds and Private Equity Funds