The next president could face another financial crisis unless the big banks get their act together. So far, they haven’t.
Democrats and Republicans agreed on almost nothing at their conventions except this: Both party platforms signaled support for resurrecting a version of the Depression-era Glass-Steagall law, a move designed to show they are willing to break up the big banks. In fact, such a law is unlikely to be enacted by either a President Hillary Clinton or a President Donald Trump. But major Wall Street firms still have reason to be concerned that the feds are getting fed up with them. And in the end the banks could get broken up anyway, even if the next president does nothing about it and there is no new Glass-Steagall act.
The new mistrust of the Street by regulators in Washington comes down to one main issue: The Federal Reserve and Federal Deposit Insurance Corp. are growing impatient with the banks’ failure to explain why they should remain so big. Eight long years after the financial collapse that almost took down the global economy, JPMorgan Chase, Bank of America, Wells Fargo, Bank of New York Mellon and State Street have failed to provide satisfactory “living wills,” or credible plans for how they would keep serving clients and markets if they ever needed to be reorganized in bankruptcy. Regulators handed down failing grades to the banks in April.
That’s the second time in two years that major banks have fallen short of regulators’ expectations in one of these tests. The banks must decide how much they are willing to sacrifice by an Oct. 1 deadline, when FDIC Chairman Martin Gruenberg says he wants to see “concrete changes.”
If they fail again, the government would have the authority to ratchet up regulation of the firms—which could make investors impatient, forcing the banks to divest more assets and make themselves smaller. And if that doesn’t work, the banks could simply be broken up. Regulators, in other words, don’t necessarily need another Glass-Steagall; they have the authority to do it now.
The bottom line is that regulators are not optimistic about how the U.S. economy would fare, even now, if one of these giant firms went through bankruptcy. And that is an option that the government and the banks will be expected to entertain under laws enacted after the unpopular 2008 bailouts. To satisfy the government, the banks must simplify their still mind-bogglingly complex businesses and do a better job of showing that they can tap liquid assets that can be turned into cash during a crisis.
“It requires the will to do so,” the FDIC’s Gruenberg told Politico. “These are not necessarily easy things to do. They require hard decisions by the firms.”