Will new US bank law threaten work?
7 December 1999
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18 June 2014
David Morley, head of banking, Allen & Overy
Peter Kohl, head of banking, Dorsey & Whitney
Peter Gaines, partner, Baker & McKenzie
A long-awaited change in US legislation may lead to the first major re-structuring of US banking in more than 60 years.
The Glass-Steagall Act 1933 was passed to put up barriers between banking, insurance and securities services after the Great Depression. It has disallowed financial institutions from offering all three services.
Now it seems likely that the legislation is set to be overthrown.
A change in banking laws will have far-reaching effects for the banking community. But will lawyers gain work from the potential rush for consolidation in the sector, or will it mean law firms lose out in the long term?
Head of banking at Allen & Overy David Morley says: "If the act is overturned it will continue a trend of convergence between investment banking and commercial banking.
"Citibank, a commercial bank, and Salomon, an investment bank, have recently merged. More mergers will follow because it will be easier."
But Morley thinks this will lead to the need for fewer firms on banking panels: "This is part of globalisation. There are fewer banks across the world offering more services, and they need fewer firms to advise them. This is a continuing process.
"Banks introduced panels 10-12 years ago, but now they are cutting them."
Morley says it is likely that second-tier firms will suffer as they could be instructed less over time by banks as further consolidation would encourage that. "Fringe players will find it difficult," he says.
He warns UK firms should not see themselves isolated from American developments. "There are only one or two British investment banks.
"Changes in the US affect UK law firms that advise US investment banks."
He adds: "Banks are struggling for global dominance and American banks are probably going to be more dominant in the long run.
"The big law firms are mirroring the banking struggle."
Morley says this means UK firms have a tough job ahead.
"They are dominant in Europe, but are not dominating the US in the way they want to.
"The race is on for world dominance. Banking and law are in a similar, competitive game," he says.
Peter Kohl, head of banking at US firm Dorsey & Whitney's London office, agrees that banks are competing for world dominance.
"If the Glass-Steagall Act is overturned, then commercial banks can do more investment banking work," he says.
But he does not think this necessarily means more consolidation through acquisitions of investment banks by commercial banks.
"Either there will be consolidation because the wealthier commercial banks will be able to purchase investment banks, which would lead to fewer clients and fewer firms advising them. Or the opposite could happen. Commercial banks could create investment banking divisions organically, and then compete with the investment banks."
In this situation commercial banks would expand services and require more legal advice and investment banks would continue to exist in their present form. This would mean more firms would advise the broader number of clients.
Peter Gaines, banking partner in Baker & McKenzie's London office, says: "The Glass-Steagall Act was introduced after the Depression. It is an outdated idea."
He says it is stifling the development of US banks, and if changed it will encourage banks to merge and expand into other areas.
Gaines also thinks second-tier firms will lose out most if this catalyst to globalisation goes through, as only international law firms will have the capacity to advise these clients.
He says: "The dropping of Glass-Steagall will help us to do that because our banking clients will change. We will see a massive alteration in the international aspirations of US banks."