It's easy to look at the American bank industry today and assume that this is how it's always been. But the truth is that the current state of banking in America is a relatively recent phenomenon, taking its form during the deregulatory movement of the past half century.
The Motley Fool's Gaby Lapera and John Maxfield discuss this in the video below, highlighting in particular the role that deregulation played in allowing Bank of America (NYSE:BAC) to spread its branches across the United States, and in permitting JPMorgan Chase (NYSE:JPM) and Citigroup (NYSE:C) to once again operate both investment and commercial banking businesses under the same roof.
A transcript follows the video.
This podcast was recorded on March 28, 2016.
Gaby Lapera: We have this consolidation. We have our first national banks appearing because of other regulations that got a little bit loosened during this era. Before this, you couldn't have branches that went across state lines. Post savings and loan crisis that is something that happened. Also, the Glass-Steagall Act was loosened up a little so that investment banks and commercial banks could be housed under the same umbrella.
John Maxfield: That's right. This kicked off ... The oil crisis kicked off a period of very, very significant deregulation. To Gaby's point, three things in particular happened. First, banks, for the most part, across the country, were then allowed to start branching. Before this, branch bank branching, the regulations, that was dictated on the state level. Some states, like California, allowed it. That's one of the reasons Bank of America was able to get so big. It could have hundreds, thousands of branches across the state whereas banks in say, Kansas, could only have one location. Branch banking started to be allowed on the national level. The second thing is that interstate banking. Before this, banks could not have branches or other offices in other states. They are limited to the state that they are founded in. But that was opened up in a time period when the oil crisis in today. The third thing that really changed was that Glass-Steagall was really chipped away at. That's where you started to have these huge universal banks that have, again, investment banking operations and commercial banking operations and that these are your Citigroups, your J.P. Morgan Chase's, and your Bank of Americas.
Lapera: They're like technically separated inside the banks but they can operate under the same corporate structure now.
Maxfield: That's right. They're balance sheet is ... Technically they do different things. They all use the bank's balance sheet. If you're taking excessive risks in your trading operation, that could hit your balance sheet, which could then impact your commercial banking operation.