On the campaign trail, President Trump called for breaking up the nation's biggest banks. This resonated with his constituents, but it wasn't until this week that he reiterated his interest as the sitting president of the United States in potentially doing so.
"I'm looking at that right now," Trump said in an interview with Bloomberg News. "There's some people that want to go back to the old system, right? So we're going to look at that."
He's referring to universal banks, those with both investment and commercial banking operations. This was a core concept of the Glass-Steagall Act of 1933, passed in the midst of the Great Depression. But it was repealed in the deregulatory fervor of the 1990s.
Trump's principal economic advisor, Gary Cohn, had previously made a similar suggestion. He told members of the Senate Banking Committee in April that he could support a policy separating the two businesses.
The banks that would be hardest hit by a reinstated Glass-Steagall are JPMorgan Chase (JPM -0.08%), Bank of America (BAC -0.83%), and Citigroup (C -0.75%), all of which have sizable commercial and investment banking operations.
Although the market reacted on Monday to President Trump's remarks, causing bank stocks to drop suddenly, these three stocks quickly recovered and ended the day higher.
- Bank of America was up 1.16%
- JPMorgan Chase was up 0.07%
- Citigroup was up 0.58%
Investors seemed to conclude that the chances of a new Glass-Steagall are slim to none. It's worth keeping in mind that Trump made the remarks at a gathering of community bankers, who have traditionally been at odds with the likes of JPMorgan Chase, Bank of America, and Citigroup.
In order for major U.S.-based banks to stay competitive on a global basis -- something Trump has repeatedly discussed in the context of regulatory and tax relief -- they need the full array of financial products that large multinational corporations use to raise capital and manage risk around the world. Take away some of these product lines, and universal banks in China, Europe, and Japan will be left with an advantage.
Moreover, despite assertions to the contrary, there's no evidence to suggest that breaking them up would unlock value and thereby be beneficial to shareholders. There are theoretical arguments that it would, but that's a long way from tangible evidence stemming from actual experience.
The point is that while breaking up the banks plays well on the campaign trail and resonates with certain audiences, it doesn't make sense from either an "America First" perspective or from a business perspective to reinstate Glass-Steagall's prohibition of universal banks.
It thus seems unlikely that Trump will actually move to break up banks like JPMorgan Chase, Bank of America, and Citigroup -- which explains why their stocks ended the day unfazed by his statement about possibly doing so.