Populist calls for breaking up the big Wall Street banks are sparked by concerns about huge financial institutions that have grown "too big to fail." The fear is that these banks could bring down the economy if they become insolvent. Meanwhile, executives of these firms are waging a public relations counter-offensive, pointing out how size and a diversified business model actually has increased their financial stability, the Financial Times reports.
Of particular concern to the big banks are bipartisan calls for reimposing the Depression-era Glass-Steagall Act, which prohibited commercial banks from engaging in most investment banking activities until its repeal in 1999. The banks point out that, despite popular mythology to the contrary, repeal played little, if any, role in causing the 2008 financial crisis. (For more, see also: Will Trump Reimpose Glass-Steagall?)
How Fears Have Changed
A secondary concern for big banks is that their commercial and consumer banking businesses also might face calls for a breakup, based on the same "too big to fail" fears. However, it is worth noting that, in the past, economists generally held that the traditionally fragmented nature of banking in the U.S. caused a higher incidence of bank failures and banking crises than in countries served by a few large national banks. The theory was that legal limits on the size and geographic footprint of banking institutions produced too many small banks that were risky by virtue of inefficiently small scale and insufficient diversification, quite the opposite of the "too big to fail" concerns of today. The extreme case was that of unit banking, the result of laws in some states that limited banks to a single location.
The highest-profile institutions that a return of Glass-Steagall would force to break apart are Bank of America Corp (BAC), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC). All are the product of post-repeal mergers between large commercial banks and leading investment banking firms. Bank of America is the corporate parent of Merrill Lynch. Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) are frequently called banks in the financial press, and technically changed their charters to become commercial banks, yet they nonetheless remain primarily investment banking firms with relatively limited commercial banking activities. The charter change was urged by federal regulators, allowing these firms to qualify for TARP funding while also placing them under additional regulatory scrutiny.
Profit Boost From Diversification
For the first quarter, the banks that reported on April 13 all beat the consensus earnings per share (EPS) estimates offered by analysts, according to the Wall Street Journal: Citigroup ($1.35 vs. $1.24) JPMorgan Chase ($1.65 vs. $1.52) and Wells Fargo ($1.00 vs. $0.97). All also were up versus their actual first quarter EPS in 2016, which were $1.10, $1.35 and $0.99, respectively. However, all three firms needed a strong quarter (a record quarter for JPMorgan Chase) from investment banking activities to offset big profit declines in mortgage loans, auto loans and other consumer lending versus the same period in 2016, both Business Insider and the FT add.
Bank of America and Goldman report on April 17, Morgan Stanley on April 18. For these firms, the consensus EPS estimates for the first quarter are, compared to the same period in 2016, according to Yahoo! Finance: BofA, $0.35 vs. $0.28, Goldman, $5.31 vs. $2.68, and Morgan Stanley, $0.88 vs. $0.55. (For more, see: Trump's Bank Deregulation May Send Investors $120B.)
High Flying Stocks
Partly based on strong earnings trends, the stocks of these leading banks have risen dramatically from their Election Day close through Friday. According to Yahoo! Finance: BofA +31.4% ($22.34 vs. $17.00), Goldman +22.8% ($223.32 vs. $181.92), JPMorgan Chase +20.5% ($84.40 vs. $70.03), Morgan Stanley +19.3% ($40.69 vs. $34.10), and Wells Fargo +12.8% ($51.35 vs. $45.54).
Tweak, Don't Repeal, Dodd-Frank
While the Dodd-Frank Financial Regulatory Reform Bill has been criticized by bank executives and President Trump as an example of regulatory overreach, executives of the major banks appear to be increasingly wary of scrapping it entirely. Morgan Stanley CEO James Gorman, for example, told CNBC that, while he finds the Volcker Rule restricting proprietary trading by banks has damaged liquidity in the markets, he nonetheless feels that the overall structure of the bill is "great," and he particularly approves of higher capital requirements, measures to reduce systemic risks and an "annual health check" for banks.
Other bank CEOs also have taken aim at the Volcker Rule. They also feel that the annual bank stress tests, which Gorman calls a "health check," are arbitrary and unduly time-consuming and costly. Additionally, they find the capital rules to be contradictory and subjective as well. Moreover, analysts at Gorman's own firm estimate that hazy capital rules under Dodd-Frank have caused banks to hold excessive amounts of capital, damaging their profitability unnecessarily. (For more, see also: Dodd-Frank: How Bank CEOs Want It Changed.)