The latest political threat to Wall Street came from an unlikely pair this week: Elizabeth Warren, the liberal first-term Democratic senator from Massachusetts, and John McCain, the veteran Republican senator from Arizona defeated in the 2008 presidential election.

Ms Warren and Mr McCain teamed up with two others to introduce a bill in the upper chamber that would restore some provisions of Glass-Steagall, the Depression-era legislation separating commercial from investment banking that was repealed in 1999.

The move is not quite triggering panic among the big banks, since many lobbyists believe there is not sufficient support for the legislation to advance in Congress and Obama administration officials are also known to be sceptical.

But it adds to a drumbeat of oddly bipartisan man­oeuvres in Congress to break up the banks that has been gaining steam. In April, Sherrod Brown, an Ohio Democrat, and David Vitter, a Louisiana Republican, introduced legislation to set much tougher capital requirements on big banks.

“I think that keeping basic banking safe is good for American families but it is also good for the financial system,” Ms Warren, a former Harvard University professor and frequent critic of US banks, told the Financial Times.

“No one is saying that financial institutions can’t get out and take risks on Wall Street [or] engage in the purchase and sale of exotic instruments. They just shouldn’t be able to do it with the money in people’s savings accounts,” Ms Warren said.

Frustrated banks are aware that the issue is not going away – and have criticised the proposals by saying that Glass-Steagall would not have prevented the financial crisis, because some of the companies that collapsed were not bank holding companies. And it was in fact large institutions – even though they were eventually bailed out by the government – that helped absorb some of the failed groups, limiting the damage to the system.

“I would argue that the legislation is unnecessary and a misdiagnosis of the causes of the crisis,” said Rob Nichols, president of the Financial Services Forum, a Wall Street lobby group. “Proposals to arbitrarily break up the banks are based on presumptions that large institutions are inherently more risky than smaller ones.

“I would argue that rather being a source of risk, the size and diversity of activities can help guard against risk. During the crisis they became instruments of recovery.”

Marianne Lake, JPMorgan’s finance chief, said on Friday: “Glass-Steagall didn’t have anything to do with the crisis and our business model allowed us to be a port in the storm. Our customers like doing business with us in the model that we have now.”

But Ms Warren said the view in Washington, that the proposal would languish in the upper chamber, was premature. She and her “partners”, senators Maria Cantwell, a Washington state Democrat, and Angus King, a Maine independent, had heard from other legislators interested in joining their cause. She said they would begin talking to lawmakers in the House of Representatives, but declined to name them.

The Massachusetts senator also suggested the proposal could appeal to Tea Party Republicans in the House. “I can’t predict the politics of the Tea Party, but keep in mind here, this is common sense,” she said. “I think that it may get traction in some unexpected places.”

Nevertheless, Ms Warren said she had not spoken to the White House about the proposal because she was focused on the Senate. The US Treasury declined to comment. Spokespeople for the chairmen of the Senate banking and House Financial Service committees in Congress were also silent.

The push to reinstate Glass-Steagall comes only three years after Congress and the White House agreed on sweeping financial reforms in the Dodd-Frank legislation, and there may be a hesitation to reopen what was a contentious debate. There is also a desire to see those reforms implemented before any changes.

Mr Nichols added: “I would say that our markets are more safe, more sound and more secure. The US capital markets are far better off than in recent memory and so we should be mindful of the regulatory or the legislative pendulum swinging too far and the impact it could have our very fragile economic recovery.”

He also noted that shrinking the US banks could hurt their competitiveness around the world, since the American banking system is already more fragmented. “Our banking system is less concentrated than our global peers and if you look at the size of overall banks, globally among the top 20 or 25 financial institutions we have just three or four on that list”,” Mr Nichols said.

Additional reporting by Tom Braithwaite in New York

Get alerts on US banks when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article