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Portfolio > Alternative Investments > Private Equity

New Glass-Steagall Bill: Winners and Losers

By Janet Levaux

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A bipartisan group of senators is moving to reintroduce the 21st Century Glass-Steagall Act following support of such reforms from Gary Cohn, President Donald Trump’s economic advisor.

Though some financial analysts see the chance of politicians actually putting up a new wall between commercial and investment banking as slim, they acknowledge it represents at least “a headline risk” to the banking sector.

“Many Democrats would support reinstating Glass-Steagall, but in return we think they would need to accept significant changes to Dodd-Frank and are unlikely to do so,” said KBW bank analysts Brian Gardner and Michael Michaud, in a recent note.

“They might be asked to support the elimination of the Consumer Financial Protection Bureau, and we think that would be a bridge too far for many Democrats,” they explained.

Plus, congressional Republicans are not poised to support Glass-Steagall’s return since it likely is “too high a price to pay for changes to Dodd-Frank.”

Still, a renewed Glass-Steagall has the support of Treasury Secretary Steven Mnuchin and Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig and seems to be poised for extensive debate.

Winners, Losers

Which institutions would benefit from the separation of commercial and investment banking businesses?

Community banks and regional banks, according to Gardner and Michaud.

They are poised to “pick off some business and market share from banks that are forced to restructure.”

Other winners include “global systemically important banks” not currently engaged in consumer banking.

There’s also the private equity industry looking to buy divested assets from affected banks, and M&A advisors searching to do more restructuring work.

As for losers, large, diversified banks that do both consumer and investment banking would be most negatively affected, the KBW analysts say.

Equity strategist Bob Doll of Nuveen echoed this thinking in an interview Thursday on Bloomberg TV.

“The banks have had so much on their plate and they need to digest it,” Doll said. “Letting banks get back on their own feet makes a lot of sense. If we throw this in, it’s just another headache that I think will retard the return to health of the banking system.”

As part of a new Glass-Steagall plan, the government might make broker-dealers become subsidiaries of holding companies, rather than units of banks, Cowen Group analyst Jaret Seiberg wrote in a report this week cited by Bloomberg.

The brokerage operations might need to be funded separately, too, the analyst says.

“Cohn was the most likely obstacle within the Trump White House,” explained Seiberg. “With him supporting Glass-Steagall’s restoration, there is no one in the inner circle left to fight it.”

— Check out Bad Explanations for the Financial Crisis Won’t Die on ThinkAdvisor.

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