As now-President Trump’s campaign took off, it seemed to us likely that he would go for something like a new-age Glass-Steagall, a forecast we restated after the election.  When now-Secretary Mnuchin mentioned this in his official response to Senate Finance, we highlighted it again and laid out how it might work.  When FDIC Vice Chairman Hoenig plowed into the details, we pointed to their political plausibility despite some significant policy reservations.  With White House comments reinforcing our political plausibility point, we went into more detail about what might be in store.  At each of these steps, we’ve been told that nothing along any of these lines could ever happen and so some said again yesterday when it surfaced that National Economic Council Director Cohn committed to Glass-Steagall 2.0 in a meeting with the Senate Banking Committee.  Much of the skepticism I’ve heard comes from the combination of distaste for the idea and disdain for the ability of Congress to do anything about it. Understood and then some, but here’s what to remember:  1) much of this plan doesn’t need Congress; and 2) Mr. Trump can have his Glass-Steagall cake and still eat regulatory relief because the rules for banks could get a lot less binding even as BHCs are severed into component parts.

We called the Hoenig-Mnuchin approach “FHC-heavy” to emphasize how much of it reflects longstanding U.S. financial policy as well as the extent to which it can be accomplished under current law.  Calling the idea Glass-Steagall 2.0 is catchy, but it creates an impression that statutory change along the Warren-McCain bill’s lines is necessary.  Analysts yesterday pooh-poohed the prospects of legislative action because nothing in the Hensarling Choice Act in the last Congress or its likely 2.0 version encompasses anything like a Glass-Steagall redo.  But, pull apart what can be done by rule and what’s needed in law and one can see clear areas of possible compromise.

The Dodd-Frank Act gave the current crop of Obama-appointed regulators sweeping power to impose tough rules contemplated only in broad scope by the law’s systemic-regulatory requirements.  Just as they gave, so could Trump regulators take away, recrafting capital, liquidity, risk-management, and activity rules more to their liking.  There is, for example, nothing in Dodd-Frank that says where in a holding company that specific rules must apply; the law is clear only that its standards come or go based on the $50 billion threshold.  Inter-affiliate transaction restrictions – critical to de facto segregation of commercial and investment banking – are also given broad scope in the law based on the Federal Reserve’s inclinations. 

Is that all there is to FHC-heavy?  Of course not.  For companies such as Goldman Sachs to get what they likely want requires statutory change to the “Hotel California” rules that bind them to the BHC charters they chose during the crisis.  If Hotel California is repealed, then companies that want to keep small insured depositories while leaping back into investment banking could merrily do so even if the Dodd-Frank regime for BHCs with assets over $50 billion is somehow left as is.  Skeptics about the willingness of Rep. Hensarling to support the Administration should note that his bill repeals Hotel California.  Impermeable barriers between an insured depository and its affiliates also require new law, as does the critical change Secretary Mnuchin suggested to the Dodd-Frank resolution regime and related Bankruptcy Code reform.  Again, check out Mr. Hensarling. 

To really parse these odds, one has to move past the punditry to assess what the real arbiters of banking policy – community banks – think of it.  Remember first that community banks strongly support the Glass-Steagall 1.0 of 1933.  Then is still now to these bankers, convinced as many are that the challenges of small banks derive from the depredation of big ones.  Unless the Trump plan is more generous to Goldman Sachs-style banks than community bankers can stomach, they will rally behind this approach and bring hundreds of House and Senate Members with then.

Knowing how important this is, I expect the Trump Administration to sweeten the pot for all banks below say, $250 billion in assets.  As the President is fond of saying, capital undermines credit availability, making relief here also a top priority.  A lot of relief can also be provided without any new law – see above.  However, to get what’s wanted embodied into law, look for a very large package of very expansive relief for smaller banks.  Then, the bidding will really begin.