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Commercial Banking and Retail Brokerage

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From 1932 until 1999 there was a law called The Glass-Steagall Act, which said that commercial banks can lend money, extend lines of credit, and open checking and savings accounts, while investment banks can underwrite securities, advise on M&A, and provide institutional brokerage services.

Under the Glass Stegall Act, commercial banks and investment banks had to limit their respective activities to that which traditionally fell under those respective labels.

Late 1999 saw the repeal of the Depression-era Glass-Steagall Act, marking the deregulation of the financial services industry. This now allowed commercial banks, investment banks, insurers, and securities brokerages to offer one another’s services.

As such, many investment banks now offer retail brokerage (retail meaning the customers are individual investors rather than institutional investors) as well as commercial lending. For example, today you can open a checking account with JP Morgan via its Chase brand, while JP Morgan offers investment banking services and asset management.  Until 1999, one financial institution providing all of these services under one roof was technically not allowed (although many post-enactment loopholes basically neutered the law long before 1999).

It is not an understatement to say that deregulation has transformed the financial services industry, with the repeal paving the way for mega-mergers and consolidation in the financial services industry.

In fact, many blame the repeal of the Glass-Steagall as a contributing factor to the financial crisis in 2008-9.

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