Once again, there is a historical parallel in America. In the wake of the Wall Street crash, the government moved to separate the stock market from the money market. The crash had left some 40 percent of the nation's commercial banks bankrupt and many regional governors had closed banks altogether. The Glass-Steagall Act which followed prevented banks from investing so heavily in potentially illiquid equities that they would be unable to meet their liabilities when depositors asked.
The Glass-Steagall legislation was crucial in helping savers regain their confidence in banks. "It helped restore confidence in a totally discredited financial system," said Daniel Yergin, author of "The Prize," an analysis of the development of the oil industry. "It helped reduce the likelihood of crisis and promoted financial liquidity."
Glass-Steagall strengthened the division between investment and commercial banking erected by the original Banking Act legislation of the 1860s. Although Wall Street banks have widely got round the legislation, the banks are only now in the process of officially undoing the Glass-Steagall straitjacket.
With today's prognoses that Russia's banking industry faces a massive crunch, some believe a version of Glass-Steagall might be appropriate here too. For the heavy investment of several of the banks which are busy building up FIGs could soon leave them high and dry if there was a run on the bank. Only a handful of Russian banks have a deep enough capital base to manage long-term investments.
"It may well be that we need a clear distinction between investment banking and commercial banking," said Pyotr Aven, president of Alfa-Bank, conceding that large illiquid equity holdings by banks are dangerous in Russia's fragile financial environment.
As in anti-trust legislation, the question facing Russian legislators today is not so much whether the country currently needs Glass-Steagall legislation, but whether such a ruling could be implemented. Russia's financial whiz-kids are every bit as innovative as their Wall Street counterparts -- strings of derivatives can quite simply be constructed which circumvent regulations on equity holding. The whole idea behind Glass-Steagall could well be redundant in today's fiber-optic financial reality.
"Even if Glass-Steagall cannot effectively be implemented, Russia needs walls between lending and underwriting," said Yergin. "Russia, like any other market system, needs rules if it is going to be successful over any period."
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