As President Trump promises a major rollback of the post-financial-crisis rules on banks, his administration is muddying his deregulation message by pushing a new Glass-Steagall, a recession-era policy more commonly associated with Sens. Bernie Sanders and Elizabeth Warren than with Republicans.
The 1933 Glass-Steagall law, mostly repealed in the late 1990s, separated commercial and investment banks. Reinstating it would effectively break up megabanks with diverse lines of business, such as JPMorgan Chase, Citigroup and Goldman Sachs, the last of which notably has many alumni in the White House.
It would be a major victory for populists and liberals and is among the last things Wall Street wanted out of the unified Republican government that took office in January.
While some in the financial industry see the Trump team’s repeated assertions that it backs some kind of Glass-Steagall as an empty slogan, others see reason to be concerned that the president still hasn’t reversed on the issue, as he has on many others.
Most bankers have been paying attention to other matters. They have been preoccupied with trying to shape a Dodd-Frank replacement bill introduced by Republicans in the House, providing ideas for the Senate Banking Committee’s attempt to find bipartisan regulatory relief measures or looking for Trump to staff his administration with helpful regulators.
With all that going on, some bankers felt as though they should not be distracted when Trump’s economic adviser Gary Cohn, formerly the president of Goldman Sachs, said this month that he is looking for a “21st-century, modern Glass-Steagall,” a message that was repeated by press secretary Sean Spicer.
“Reinstating that separation is likely not legislatively feasible, nor consistent with everything else we’re hearing out of the administration,” said one Wall Street lawyer.
In fact, Glass-Steagall legislation isn’t likely, even though a bipartisan group of lawmakers, including Sens. Elizabeth Warren, D-Mass., and John McCain, R-Ariz., cited Cohn in introducing a bill that would create an even more aggressive form of the law in April. But there simply aren’t enough Republican lawmakers who would sign on.
Administrative action would be more likely. And the administration could do “a huge amount” with the powers it has now to impose a form of Glass-Steagall, according to Karen Petrou, managing partner for Federal Financial Analytics, which advises banks on regulatory affairs.
The administration already has a blueprint for action, should it want it, provided by a credible regulator: Thomas Hoenig, the vice chairman of the Federal Deposit Insurance Corporation known as an aggressive opponent of too-big-to-fail.
In March, Hoenig laid out a bold proposal for instituting what many viewed as a form of Glass-Steagall-light. Today’s megabanks could be required to create two divisions within their corporate super-structures: one for traditional banking that involves insured deposits and another for broker-dealers, insurance businesses and hedge funds. If the second division ran into trouble, it could be sold off or put through bankruptcy without affecting the first division, which would get rid of the possibility of the FDIC or Federal Reserve’s rescuing a noncommercial bank.
Hoenig’s proposal, similar to a “ringfencing” policy implemented in the United Kingdom, could be coupled with a reduction in other regulations meant to keep big banks safe. Cohn also suggested that his own version of Glass-Steagall would go with tailoring regulations to the size of banks.
Such a measure would impose costs on giant banks such as Bank of America and Wells Fargo and accordingly could prove attractive to community banks and credit unions that would like to see the playing field leveled out between themselves and megabanks they see as aided by bailouts from the government. In recent years, those community banks have become more hostile toward big banks in lobbying efforts on Capitol Hill.
Speaking Wednesday at a conference on banking regulation, Hoenig was asked about the possibility of a reimposition of Glass-Steagall. “I’m not sure where that will go,” he answered. “But there are other alternatives,” including his own proposal.
While something like the Hoenig plan remains an outside possibility, banks should be alert, said Petrou, because the effects would be major. “Any bank whose business model is at risk or sees great opportunity … has to be engaged,” she warned.
Another bank consultant agreed that it was important to begin working against any proposals to reinstate Glass-Steagall, however half-hearted, if only because many officials and members of Congress do not understand the implications of the far-reaching policy. “It’s a great evergreen platform that appeals to a populist level of the population,” said the consultant, who didn’t want to be named because of ongoing work with banks and the administration.
At various times, lawmakers on both sides of the aisle have signed onto bringing back Glass-Steagall without any follow-up. For instance, House Speaker Paul Ryan endorsed the idea in the past, and the Republican platform in 2016 did as well.
The concern is that talking about bringing back Glass-Steagall could distract from banks’ agenda for this Congress, which includes paring back the part of the Dodd-Frank law meant to emulate some of the effects of the Depression-era law. The so-called “Volcker Rule” included in Dodd-Frank is meant to prevent insured banks from speculating with depositors’ funds or owning hedge funds.
The Dodd-Frank replacement introduced by House Financial Services Committee Chairman Jeb Hensarling would repeal the Volcker Rule, in effect moving in the opposite direction of reimposing Glass-Steagall.
Senate Democrats would block any repeal of the Volcker Rule. But there is likely to be support among regulators for changing it. Daniel Tarullo, the Federal Reserve’s point man for regulation during the Obama years, said on leaving office in April that the rule was too complicated and should be revisited.
In theory, Trump’s team, comprising many Wall Street veterans, should be on board with that effort. But Treasury Secretary Steven Mnuchin’s comments on the Volcker Rule during confirmation have been interpreted differently by different people, which has been made worse by the administration’s confusion over Glass-Steagall.
“Mnuchin’s been all over the place on Volcker,” the consultant said.
