The Republican convention has left Wall Street banks on edge by embracing a populist proposal to break up big institutions, an idea loved by many Democrats that adds a new twist to the GOP under Donald Trump.
Defying nearly two decades of party tradition, the Cleveland convention adopted policies that include reining in banks by banning institutions that hold deposits from doing riskier investment banking, mirroring a law from the Great Depression. The policy platform was written by a committee of Republican lawmakers and officials.
The proposal to cut banks down to size has created an unexpected accord between the Republican and Democratic platforms as Hillary Clinton’s party — under the influence of her bank-bashing former rival Bernie Sanders — had made a similar call.
It signals that bipartisan enmity towards the biggest banks continues to run high amid widespread economic discontent, with many Americans still feeling the hangover of the 2008-09 financial crisis in which Wall Street played a fatal role.
Presidential candidates do not have to follow party platforms, but big banks will be troubled by the cross-party support for legislation inspired by the 1933 Glass-Steagall act because such ideas can gain a life of their own once in official documents.
Any prohibition barring investment bankers from operating under the same roof as federally insured deposits would pose an existential challenge to Citigroup, JPMorgan, Bank of America, Wells Fargo and, to a lesser extent, Goldman Sachs.
The original Glass-Steagall act was abolished in 1999 when President Bill Clinton signed bank reform legislation that was crafted by Republican lawmakers and backed by many Democrats in Congress.
Aaron Klein, a former Treasury official in the Obama administration who is now at the Brookings Institution, said calls to reinstate Glass-Steagall failed to recognise how the world had changed, but tapped into an understandable strain of popular feeling.
“At the most simple level, the idea is that our grandparents put in place strong rules after the depression; we went away from those rules in the deregulation of the 1980s, 1990s and 2000s; and we need to remember the wisdom of that generation,” Mr Klein said.
One line of a 54-page document which the Republican platform adopted on Monday says: “We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment.”
We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment
Tony Fratto, a bank ally and former Treasury official under President George W Bush, said: “Glass-Steagall is dumb politics and dumb economics … Returning to Glass-Steagall would be destructive and unworkable. As every analysis has demonstrated, Glass-Steagall would have done nothing to prevent the crisis. There is a lot in this platform to ignore.”
The Democratic platform, due to be adopted at the convention in Philadelphia next week, says: “Banks should not be able to gamble with taxpayers’ deposits or pose an undue risk to Main Street. Democrats support a variety of ways to stop this from happening, including an updated and modernised version of Glass-Steagall and breaking up too-big-to-fail financial institutions that pose a systemic risk to the stability of our economy.”
Glass-Steagall is dumb politics and dumb economics … Returning to Glass-Steagall would be destructive and unworkable
The inclusion of such language marked an important victory for Mr Sanders, a self-declared socialist, who is seeking to use influence wrought from his successful primary campaign to make Mrs Clinton take a tougher line on Wall Street.
Critics of the new Glass-Steagall movement point out that the act would have done little, if anything, to affect Lehman Brothers, the investment bank whose collapse precipitated the darkest days of the last crisis.
The top Republicans on banking policy in Congress — Richard Shelby in the Senate and Jeb Hensarling in the House of Representatives — have shown little enthusiasm for Glass-Steagall and have fought instead, unsuccessfully, to water down the Dodd-Frank post-crisis reforms.
Although unusual, it is not unheard of for a Republican to support a forced separation of deposit-taking and investment banking. In 2013, Senator John McCain, the 2008 presidential nominee, introduced a bill aiming to recreate Glass-Steagall in alliance with Senator Elizabeth Warren, the leftwing firebrand who has this year become one of Mr Trump’s most vocal critics.
Additional reporting by Ben McLannahan in New York