Who Will Break-up the Big Banks?

Breaking-up is hard to do, as the 1960s-era crooner Neil Sadaka sang to his thousands of fans.

But it’s easy to talk about it, at least for the bankers and analysts who have revived the debate recently about whether the biggest banks in the country ought to be sold off in pieces.

Richard Fisher, the Dallas Federal Reserve president and CEO, lit the embers in his annual report published last month calling for a break-up of the big banks. The annual report says that the Dallas Fed thinks the Dodd-Frank Act may actually perpetuate an already dangerous trend of increasing banking industry concentration, with the top 10 banks controlling 61 percent of commercial banking assets, compared to 26 percent of assets only 20 years ago.

Keefe, Bruyette & Woods analysts kept the fires going with their report last week saying that investors should be prepared for the possible eventual break-up of the largest financials, including Bank of America Corp., Citigroup and JPMorgan Chase & Co.

The analysts, who include Fred Cannon, the investment bank’s head of research and chief equity strategist, say that history indicates a break-up of conglomerates following a period of higher regulation and a decline in profitability. (That, by the way, is the period we’re in now.)

They base that conclusion on a World Bank analysis showing the cyclical nature of privatization and nationalization in national economies.

The top 10 banks likely will “shrink or break-up in the coming years,’’ KBW says, due to increased regulations, the inefficiencies of size and higher capital requirements.

So it may not be Congressional action that breaks up the big banks. It could just be a combination of market forces and government regulation that forces the big banks to sell off assets. One way to meet higher capital demands, after all, is to shrink the size of balance sheet, so less capital is needed.

KBW did not make analysts available to discuss their report.

But one analyst who follows the big banks took issue with KBW’s assessment.

“The big banks have grown bigger on a consistent basis,’’ said Richard Bove of Rochdale Securities, when contacted by phone. “If small, monoline companies were efficient, they would be increasing market share and big banks would be shrinking. We have lost one small bank every day for 31 years.”

He also gets upset when he hears arguments that the big banks ought to be broken up for the benefit of the economy. His reasoning is that the U.S. economy needs big, international banks to compete with foreign banks, which in many cases, are bigger still. There are only seven U.S.-based primary dealers, the institutions that try to sell the U.S. Treasury’s bonds. In contrast, there are 14 foreign banks that serve as primary dealers of U.S. debt, he says.

Does anyone really think a few banks in places such as Albuquerque and Des Moines will sell $15 trillion worth of government debt?

Arguments about foreigners funding the national debt aside, it seems clear that breaking up the largest banks ought to be taken with some care.

SNL Financial contributing editor and independent analyst Nancy Bush says as much in her latest report.

“The more I think about it, read about it, and talk to experts on the subject, the more questions that arise and the more apparent it becomes that this debate needs to be carried out in a thoughtful and holistic way, not with the ad hoc public pronouncements that get press but do not move the topic forward,’’ she writes. “Let’s have Ben Bernanke and Paul Volcker and Richard Fisher and Jamie Dimon and John Stumpf and all the other interested parties (including the head of the CFPB) sit down in a public forum, bring their reasoned arguments and their numbers with them and have this debate once and for all. Too much is riding on this question, including billions of dollars of shareholder value, and too much will be lost if we cannot come to some kind of consensus about the banking industry that will take us forward into the New Normal.”

It may be that market forces will reduce the size of the big banks. Government regulations can make certain business segments more profitable outside the highly regulated commercial banking industry. The Volker Rule will limit the amount of proprietary trading banks can do, for example. Many of the biggest banks already have been voluntarily reducing their size, such as Citigroup, and many are trying to get more efficient, such as Bank of America. That’s not to say the big banks are likely to break themselves in two without being forced to do so. Imagine Jamie Dimon thinking it’s a good idea to split JPMorgan Chase back into J.P. Morgan and Chase. Not going to happen.

And it looks doubtful there’s any political consensus on breaking up the big banks. The Republicans aren’t all against big banks and neither are the Democrats. Plus, Congress can’t agree on a budget, let alone a plan to scrap the banks. So for now, it looks just like talk.