Could Citi, BAC, JPM Be Forced to Split? KBW Says Yes

Many of the “Too Big to Fail” banks are still extremely big — bigger in many cases than before the financial meltdown and subsequent rounds of forced consolidation. But KBW banking analyst Frederick Cannon says we are now entering an era of tight regulation, and investors need to be prepared for numerous outcomes — including the possible breakup of the biggest U.S. banks.

“The deregulation cycle in the U.S. financial industry likely peaked in 1999 with the passage of the Gramm-Leach-Bliley Act following three decades of cutbacks in the laws and rules governing the financial services sector. Although the actions of many private lenders during the 2000s are blamed for the financial crisis, the decade actually was generally one of increased regulation, including privacy legislation and Sarbannes/Oxley. Regulation has accelerated since the financial crisis, primarily with the passage of Dodd-Frank and the U.S. agreement to the Basel standards for bank capital.”

When regulation comes back with a vengeance, financial companies are generally forced to break up, according to Cannon. JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C) are the largest banks/brokers by assets, in that order.

“If the regulatory cycle holds, it is likely that these large institutions will shrink or break up in the coming years. This is due to three factors: increased regulations, the inefficiencies of size, and higher capital requirements.”

Cannon doesn’t explain how those break-ups might happen, and there’s a strong argument (not presented in the report) that the major regulations enacted under Dodd-Frank have already lost their teeth under pressure from bank lobbyists. But Cannon is taking the long view, noting that history tends to repeat itself. And that, at least in a general sense, is hard to argue with.