Q. Senators Warren and McCain have just introduced legislation called the “21st Century Glass Stegall” Act, to reinstate the old Glass-Steagall rule. What exactly did that do?
A. After the Depression, Congress determined that a big reason for the bubble and crash was the comingling of traditional banking– basic savings and lending functions– with investment banking. So it passed the Glass-Stegal law, which required that those functions be separated into different companies. And that was the law for about 80 years, until its repeal in 1999.

Q. And so what does the Warren bill do?
A. It’s pretty tough re-enactment of the basic idea. It limits deposit-taking institutions from any sort of investment banking activity, including investing in derivatives, acting as an investment advisor to customers. It also goes further to make sure there is no “common control” of the two: so you couldn’t meet its requirements just by having a holding company with separate banking and investment banking subsidiaries… and you couldn’t even have the same humans in the management of the two kinds of entities.

Q. And their big argument is that taxpayers shouldn’t be insuring deposits that might be at risk because of investment banking activities…
A. Yes, but it also goes to the basic “too big to fail” argument. Take a look at this chart and you’ll see how the share of deposits held by the top 5 banks has continued to grow since the GS repeal.

Q. But there are other ways of attacking these problems, right?
A. Yes. A couple of Dodd-Frank rules are kicking in. One is the “push out” rule, swaps and derivates operations to be pushed out of deposit institutions. The Volker of Dodd Frank would also limits investments by deposit taking institutions, and as a result, JPM, for example, is spinning off its private equity arm.

Q. And, as we’ve been talking about this week, the new bank leverage proposals get at the same point from a different direction…
A. Yes. Simple total leverage-to-capital rules could themselves limit bank size… A different bill in the Senate would take that all the way up to 15%, about 3 times what the Fed just proposed this week. That would sure make everybody skinny down!