President Donald Trump is considering breaking up the nation’s biggest banks, a vow he had made during the presidential campaign then seemed to put on the back burner.
Trump said he is “looking at that right now,” in an interview with Bloomberg News.
Major averages slipped as the news broke, then rebounded, while government bond yields hit their highs of the day.
However, bank stocks rallied, with investor taking a win-win view: Breaking up the big banks would open business opportunities for smaller institutions, while the large Wall Street firms would be worth more as separate entities than they are combined.
“The theory has always been the sum of the parts is worth considerably more than the whole,” said analyst Dick Bove, vice president for equity research at Rafferty Capital Markets. “You might find a lot of investors who say that (if) they’re going to break up these banks, they’re more in pieces than they are together, I’m going to buy them.”
Bank of America shares jumped 1.3 percent, just off the session high as the market digested the news, while JPMorgan Chase was up 0.6 percent.
The industry breakup would come with the revival of a Glass-Steagall-type law, which separated commercial and investment banks but was repealed in 1999.
Stocks fell on the news, though bank shares remained higher overall. The SPDR S&P Bank exchange-traded fund was up about 0.4 percent in the aftermath of Trump’s remarks, thought it was off its highs for the day.
Trump’s sentiments came the same day he met with leaders of the Independent Community Bankers Association, an advocacy group for small- and mid-market institutions.
Industry analyst Dick Bove believes that may not be a coincidence.
“He probably made a statement to them that they wanted to hear,” said Bove, vice president of equity research at Rafferty Capital Markets. “In the last few weeks he has been heavily campaigning again, and I think this is just part of his campaign.”
Whether anything will come of it legislatively is unclear.
“I just think he had a need to communicate, to connect again with community banks and say, ‘Hey guys, we’re on your side. We believe in you and maybe we should break up the big Wall Street banks,'” Bove added. “But I don’t expect anything to come of it.”
Bank stocks had been one of the biggest winners of the Trump trade, rallying strongly after his victory in the November presidential election. The sector rallied more than 25 percent in the immediate aftermath, but the bank ETF is down about 1.3 percent in 2017.
The Glass-Steagall law is sometimes blamed for the financial crisis that peaked in 2008. However, many of the big institutions at the center of the crisis were not banking behemoths but rather investment banks or, in the case of American International Group, an insurer.
Still, the Republican platform last year carried language calling for a reinstatement of the law.
“There’s some people that want to go back to the old system, right? So we’re going to look at that,” Trump said in the interview.