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.”

Gruenberg has an important ally in this: the Federal Reserve. Under Janet Yellen, the Fed—which once took a more lenient view of the banks—is also adopting a tougher, less tolerant tone against Wall Street. While the banks’ government supervisors were once cautious about being too intrusive, regulators who were embarrassed by their failures during the financial crisis now play a key role in many of the industry’s business decisions. And they’ve had enough: Fed officials are pledging to toughen up things like stress tests for the biggest banks at the same time they move to ease regulatory burdens on their smaller competitors.

While some officials disagree on the best remedy to end "too big to fail,” the Fed and the FDIC appear to be converging on the path forward.

Regulators say banks have made headway but in some cases have been slow to give up day-to-day efficiency in life in exchange for a less messy death, an increasingly important new benchmark for the health of the U.S. banking industry. Post-crisis, regulators are threatening to penalize banks unless they can prove that, if they collapse, there is a way to keep serving customers and avoid economic panic without taxpayer support. The Fed and FDIC are now putting pressure on the banks to look under the hood and rewire global business models that regulators allowed them to build up over decades but now see as flawed.

Thus, now is a critical moment for Wall Street, whose political influence appears to be increasingly on the outs with both parties. The populist push to make the banks feel the economic pain still lingering from the 2008 financial crisis is dovetailing with regulators’ growing fears that the banks remain addicted to complexity, which serves their business model well but also poses great risks to the overall system. The big banks’ sprawling, international structures pose challenges when it comes to quickly and efficiently figuring out how to wind them down.

This is true even of JPMorgan, the bluest of the blue-chip banks, which the Fed and FDIC warned must address potential problems with complexity. JPMorgan chief executive Jamie Dimon says the country’s largest bank has “tons” of assets that can be turned into cash in the event of a crisis and has taken “pretty draconian” steps to simplify and shed risk. Unfortunately for Dimon, the federal agencies are now saying they are less confident that the bank has done enough.

If the banks fail again after Oct. 1, regulators would consider whether to impose tougher capital requirements on the banks or restrict their growth. If that is not enough to produce results, the government would then have the option to break up the banks. "I do think this is an inflection point in the utilization of these authorities,” Gruenberg says. “The willingness of the Fed and the FDIC jointly to determine that the plans of five of these firms are not credible or would not allow for an orderly failure under resolution, that is really I think a demonstration of the will to use these authorities to require these firms to make fundamental changes."

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Much has changed over the past few years. When regulators were reviewing the 2013 drafts of 11 big banks’ living wills, the FDIC and Fed disagreed over whether to simply notify the firms of their problems or to pull the legal trigger that could result in a range of business restrictions if the firms did not shape up. The FDIC, whose primary mission is protecting retail depositors, wanted to take advantage of that authority but the Fed did not, though they jointly identified specific problems with the banks' plans and later agreed to give Wells Fargo a pass on its 2014 living will.

This time around, the two agencies appeared to disagree only on minor issues. They agreed to fail five of the banks and sent them joint letters detailing their deficiencies. Neither agency failed Citigroup’s living will.

At the same time, a new Fed official is speaking up in support of the idea that the banks might be too big. Federal Reserve Bank of Minneapolis President Neel Kashkari, a Republican who helped run the bank bailout program during the crisis and then ran for governor of California, kicked off his career at the central bank this year by suggesting that the big banks might need to be broken up to protect taxpayers. Kashkari is not one of the Federal Reserve governors with the power to pass or fail banks’ living wills, but he is proving to have a powerful bully pulpit from Minnesota. He points to the living will problems as evidence that “we must work even harder to reduce the likelihood of large bank failures because resolving them in ways that does not trigger widespread economic harm is proving so difficult.” Kashkari is echoing the concerns of FDIC Vice Chairman Thomas Hoenig, who, unlike Kashkari, does have a say in whether to fail banks on their living wills. Hoenig, previously president of the Federal Reserve Bank of Kansas City, argues that the challenge of taking the biggest banks through bankruptcy has only grown since 2008. The companies are “generally larger, more complicated and more interconnected than they were then,” he says.

One of the current costs of bigness is that regulators are requiring the banks, in the event of bankruptcy, to do a better job of proving that they can move money around their sprawling operations during a crisis and will have enough so-called liquidity to keep the lights on. The Fed and the FDIC are forcing banks to assume that money at an overseas operation could end up trapped, or ring-fenced, by a foreign government during the next meltdown. “You can’t assume if you have some excess liquidity in the London subsidiary that you can move that to the U.S., because the U.K. authorities might not allow that,” Fitch Ratings managing director Christopher Wolfe says.

Then there is the struggle to make things less complex—and therefore less systemically risky. The big banks have retained thousands of legal entities to help themselves and their clients deal with local regulations and tax laws. The federal government for years let the banks build up this way and at times even encouraged massive takeovers to help stabilize the economy. Now the Fed and the FDIC are threatening to crack down if banks don’t swing the pendulum in the other direction.

Some in the banking world quietly acknowledge that the banks have done more to appease the agencies on paper than to make difficult changes in their day-to-day operations. But there is concern among some industry lawyers that regulators are pushing banks toward a more homogeneous business model that if flawed could be a source of industrywide problems in the future. Others say that the Fed and the FDIC are moving the goal posts in terms of their demands or are forcing the firms to meet unrealistic expectations.

“I’ve had this discussion with some of my former colleagues in the government,” says Michael Krimminger, who was the FDIC’s general counsel before he moved to advise banks at the law firm Cleary Gottlieb. “They will say, ‘we all know what makes the company maximally resolvable.’ But that’s not the only thing they’re supposed to do. They’re actually supposed to conduct a sound business and make money. Sometimes people forget that.”

Outside of bankruptcy, regulators also have the option to intervene and wind down a failing mega-bank—an untested power known as “orderly liquidation authority” that Congress created in 2010 as another alternative to straight-up bailouts. The government’s own planning for that scenario is relatively more opaque, but it could be a necessary backup option until Congress updates the bankruptcy code for large banks. So far, only the House of Representatives has taken steps to set up a specialized form of bankruptcy for large financial institutions that could be less disruptive to the economy than what’s available under current law.

But if the GOP retakes the White House, a top Republican policymaker wants to curtail the living wills process altogether. House Financial Services Committee Chairman Jeb Hensarling has pitched to Trump a wide-ranging de-regulation platform that would allow banks to escape the annual contingency planning requirement. At the same time, underscoring Republicans’ antipathy toward government intervention in the banking system, the proposal would update the bankruptcy code and then repeal the fallback option that regulators have to manage the wind-down of a failing lender—one rollback that banks are quietly fighting.

From the Texas Republican’s point of view, the living wills process has led to “de facto management by federal officials.” He wants more opportunities for public input and approval by Congress.

“Certainly there should always be prudent planning, but the living wills as currently conducted I think have been abused,” he says.

Federal Reserve officials are not shy to admit that, yes, they are indeed using the living wills process as another opening to force banks to rethink their business models.

“The most fundamental and broadest concept about this is that we really want resolvability to have a seat at the table for business decisions,” Federal Reserve Governor Jerome Powell told an audience of mega-bank lawyers this month. Powell is one of the regulators who can vote to reject a bank’s living will. “Banks need to internalize the thought that they need to take resolvability into consideration in their business model, in the structure of the company, in the products that they offer,” he says. “We want to see that kind of thinking throughout the business.”

So far, Powell says he has not reached the conclusion that “a particular bank needs to be broken up.” He and Gruenberg say they believe that a big bank today could be wound down in bankruptcy or by regulators without severely disrupting the economy.

The race for the White House has indicated that, beyond practical considerations about the viability of bank structures, there is a visceral desire by voters to put the regulatory process aside and dismantle the banks. In response, Republicans and Democrats have shown they are at least willing to entertain the idea of reviving something like the Depression-era Glass-Steagall law that separated traditional and investment banking until its repeal under President Bill Clinton.

Such a dramatic overhaul of banking regulation still appears unlikely.

The inclusion of Glass-Steagall in the GOP platform was a shock, and is not representative of a more widely held view among the party’s policymakers that banks are too heavily regulated. But even if it is nothing more than helpful branding in a populist election cycle, Trump could use it to differentiate himself on Wall Street issues from Hillary Clinton. She has said she would prefer to use a more targeted set of tools to protect the economy against financial system risks. But even Clinton acceded in the Democrats’ platform to some tough pledges, including a nod to an “updated and modernized” Glass-Steagall pushed by the Bernie Sanders and Elizabeth Warren wing of the party that’s ready to break up the banks.

The left will also pressure Clinton to stick by another platform promise to appoint officials at places like the Fed and FDIC who will be willing to stand up to the firms they regulate. Expect progressives to grill Clinton nominees about their views on how much leeway the banks should get when drafting their living wills.

So while banks have grown relatively comfortable with Clinton’s nuanced financial regulation platform, they are still on guard for how she would respond to anti-Wall Street sentiment during her administration—knowing she will already have the tools to break them up even without a new Glass-Steagall act.