Despite Trump’s clamor, big-bank breakups not in the cards
Monday, Bloomberg reported President Donald Trump is “actively considering a break-up of giant Wall Street banks,” presumably through restoration of the 1933 Glass-Steagall Act that Congress largely repealed in 1999. I discussed the absurdity of that idea in a recent Hill op-ed.
Trump told Bloomberg that, “There’s some people that want to go back to the old system, right? So we’re going to look at that.”
Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn, both former Goldman Sachs bankers, have also hinted at favoring a restoration of some version of Glass-Steagall, albeit without much in the way of detail of a new strategy.
{mosads}Glass-Steagall forced commercial banks to divest their investment banking activities, which led to the creation of a set of investment banking companies distinct from commercial banking. However, as my earlier op-ed noted, technology steadily eroded the regulatory dividing line between commercial and investment banking, which led to Glass-Steagall’s repeal. Those forces make reinstituting Glass-Steagall more infeasible than ever.
Two forces are driving interest in reviving Glass-Steagall — attempts to rid the financial system of too-big-to-fail banks and a desire to level the regulatory playing field between large banks — some of which also engage in investment banking activities — and the much smaller community banks. Of the 5,913 FDIC-insured banks at the end of 2016, the FDIC had classified 5,461 of them as community banks.
The untested theory behind reinstituting a Glass-Steagall separation of commercial from investment banking is that the slimmed-down commercial banking companies would be smaller, engaged in less-risky activities and therefore easier to regulate. Consequently, the theory goes, they would be less likely to require a taxpayer bailout should they get into financial difficulty. Those banks, though, would still be very large and difficult to resolve if they experienced financial distress.
By coincidence, on Monday, Cohn and Vice President Mike Pence met with more than a hundred community bankers to discuss regulatory reform. According to a report in the American Banker newspaper, Cohn and Pence “made it clear they favored a system with different rules for small and big banks.”
Cohn suggested moving to a “two-tiered regulatory system where big and small banks would play by different rules.”
The notion of a two-tiered regulatory system has been discussed for many years. For example, smaller banks would be subject to much simpler rules for determining how much equity capital they must have on their balance sheets than would be the case for larger banks.
The challenge, though, is determining where to draw the line differentiating large banks from community banks. The Dodd-Frank Act established several such lines, usually based on the size of the bank, as measured by total assets. However, the inevitable gaming of those arbitrary demarcations has been a driver for reforming Dodd-Frank.
The “Financial CHOICE Act of 2017” (HR 10), introduced by Rep. Jeb Hensarling (R-Texas), chairman of the House Financial Services Committee, would reform many aspects of Dodd-Frank. Today, the committee will begin marking up the CHOICE Act.
That act is a logical legislative vehicle for tacking on provisions that would reinstate Glass-Steagall. However, the large banking companies, notably JPMorgan Chase, Citigroup, and Bank of America, almost certainly would try to block any such attempt, despite Trump’s apparent support for bringing back Glass-Steagall.
An administration attempt to have the House pass a stand-alone 21st-Century Glass-Steagall law would likely be defeated by deregulation-oriented Republicans.
While the House almost certainly will pass the CHOICE Act, it will have little, if any, support from Democrats. Senate Democrats, too, will oppose many of the provisions in the CHOICE Act, reducing the scope of whatever Dodd-Frank reforms the Senate passes. Senate Republicans most likely would oppose tacking Glass-Steagall-like provisions onto that legislation or passing a freestanding, 21st-Century Glass-Steagall Act.
Hence, for all the noise and clamor about bringing back Glass-Steagall, it is highly unlikely that the 115th Congress will do so, but with this caveat: If the United States experienced a financial crisis as severe as the last crisis, Congress might reinstate a 21st-Century version of Glass-Steagall even if the mixing of commercial and investment banking did not cause the crisis or even contribute to it in any manner.
Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking and thrift industries, monetary policy, the payments system, and the growing federalization of credit risk.
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