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Calls to Break Up Big Banks Again Uncalled For

As Republicans gather for their National Convention this week, there is a brouhaha going on over the party considering resurrecting the infamous Glass-Steagall Act.

The thought of the conservative party bandying about this liberal idea has many perplexed.

Many are chalking up the Glass-Steagall Act talk as political fodder during this intensely charged election year.

No matter, this particular fodder puts banks, particularly big banks, back in the lime light. So let’s look at how they’ve fared since Glass-Steagall was put to bed years ago. We have to look no further than the earnings reports from banks for the second quarter. They began reporting them last week.

 · What is Glass-Steagall?

In 1933, the Glass-Steagall Act was signed in to law as an emergency response to the thousands of banks that were failing during the Great Recession. Specifically, the act broke up the banks’ businesses, separating the commercial and investments sides.

The law was eventually repealed in 1999 as part of a bill signed by then-President Bill Clinton. Taking its place was the Gramm-Leach-Bliley Act, which requires financial institutions that offer consumers financial products or services like loans, financial or investment advice, or insurance to explain their information-sharing practices to their customers and to safeguard sensitive data.

The thought of Glass-Steagall making a comeback does not sit well with banks. They dislike anything that seeks to break up their businesses because of the impact on their top and bottom lines. Glass-Steagall’s restrictions are seen by banking observers as having an overall negative effect on not only the banks, but also the economy.

 · The Big Banks

While lawmakers may think they know what’s best for the big banks, the leaders of these institutions think otherwise. Furthermore, their vast improvements from their financial lows of 2008 seem to be behind them.

Take their earnings reports that have been released so far this year. For the second quarter, Bank of America (NYSE: BAC) Citigroup (NYSE: C) and JPMorgan Chase (NYSE: JPM) have all posted better-than-expected results.

That does not mean they are out of the woods, as there are many overhangs that remain as concerns. There are concerns about growth in the global economy, especially in light of Brexit. There is also the question of when or if the Federal Reserve will raise interest rates. Oil price volatility only aggravates the situation.

Banks must also deal with mortgage banking fees that are not expected to improve marginally due to low mortgage rates.

 · Well positioned to deal with another crisis

We told you last month about how the big banks could withstand a financial crisis like the one that slammed the industry in 2008.

Specifically, we noted a scenario entailing global recession in which the unemployment rate soared five percentage points, and there was a heightened period of financial stress, and negative yields for short-term U.S. Treasury securities. Even in such a calamity, the big banks survive.

This was determined by the Federal Reserve through the 2016 bank stress tests. The Fed noted that the above “severely adverse” scenario projected that loan losses at the 33 participating bank holding companies would total $385 billion during the nine quarters tested, and that would be sustainable.

The tests marked the sixth round of stress tests led by the Federal Reserve since 2009 and the fourth round required by the Dodd-Frank Act.

The act, and its facets such as the stress tests, is sufficient enough to monitor banks’ management of their finances.

Banks may continue to be challenged by the current operating environment, but they have proven their resilience. Their improved finance controls help to mitigate the need to break them up.

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