Abstract: Banker's Courtesy: Glass-Steagall and the Persistence of Relationship Banking in Security Underwriting in the United States, 1933-1939

Trevin S. Stratton


This paper will detail how the securities underwriting industry was re-structured following the separation of commercial and investment banking in the Glass-Steagall Act of 1933. I will demonstrate that vicious competition for investment banking business did not ensue. The practice of relationship banking persisted, as both investment banks and security affiliates had endorsed a business culture of strong banking relationships with issuing corporations. In order to determine the prevalence of relationship banking among both groups of banks, I track the movement of personnel following the separation of commercial and investment banking using archival material I have discovered from banks and the Temporary National Economic Committee. I find that the directors and officers of both groups of banks either formed new investment banking firms or joined previously existing ones. These individuals brought with them their business relationships from their previous firms, indicating that the practice of relationship banking in security underwriting was present prior to the Glass-Steagall Act and persisted afterward. I further supplement this research with expert testimony that provides valuable indications of how banking relationships operated and persisted at the time.