No matter who wins the election, the big banks could be on the chopping block.
Keefe Bruyette & Woods analyst Brian Gardner said he can imagine a scenario where horse trading in Congress next year results in a return of rules that would limit the activities of big banks as Congress tries to help smaller banks. The community banks are concerned by new regulatory capital requirements and the complexity of the rules.
Both political parties have mentioned in their party platforms returning to a simpler, Depression-era banking system by reintroducing the Glass-Steagall Act, which separated commercial and investment banking. The law was passed in 1933 but repealed in 1999 allowing for the expansion of financial institutions such as JPMorgan Chase and Citigroup.
Gardner said investors may be underappreciating the risk that a form of Glass-Steagall could be reinstated. "If Congress takes a serious look next year at regulatory relief for community banks and regional banks, then that is going to be an opportunity for the Elizabeth Warren wing of the Democratic Party to step in and pass some form of Glass-Steagall," said Gardner, who is director of Washington research at KBW.
But he also noted that party platforms are not binding and are many times ignored by candidates.
The Republican Party surprised many last week when it included a potential return to Glass-Steagall in its platform — traditionally not a GOP position.
GOP platform: "We support reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment. Sensible regulations can be compatible with a vibrant economy. They can prevent the strong from exploiting the weak. Right now, the regulators are exploiting everyone. We are determined to make regulations minimally intrusive, confined to their legal mandate, and respectful toward the creation of new and small businesses."
But Gardner said that may have been more an effort to appeal to followers of Sen. Bernie Sanders, who wants to break up the big banks.
"While some will dismiss that effort and … while there's not much of an appetite for that in Congress, the warning, the cautionary note I would offer is that if Congress is trying to pass the community bank regulatory relief bill and Elizabeth Warren and her allies are blocking the bill and if Republicans think it's a good bill for community banks, the reintroduction of Glass-Steagall might be the political price they'll have to pay," said Gardner. Warren's proposals go way beyond Glass-Steagall, he said.
Glass-Steagall was overturned after a bipartisan effort to remove it during the administration of President Bill Clinton. The end of the rule allowed for super-sized financial institutions that in theory were going to sell consumers a buffet of services for less and make the U.S. banking system more competitive on a global basis.
Then the financial crisis hit, and Congress adopted a new regulatory reform act, Dodd-Frank, which went into effect in 2010. That law also is in the cross hairs. GOP candidate Donald Trump would like get rid of Dodd-Frank, especially the Consumer Financial Protection Bureau.
Democrat Hillary Clinton wants to retain Dodd-Frank and the CFPB. "We will also vigorously implement, enforce, and build on President Obama's landmark Dodd-Frank financial reform law, and we will stop dead in its tracks every Republican effort to weaken it," the Democratic Party platform said.
But they also added a return to some form of Glass-Steagall.
The Democratic platform 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 modernized version of Glass-Steagall as well as breaking up too-big-to-fail financial institutions that pose a systemic risk to the stability of our economy."
The Democrats also propose a financial transactions tax aimed at high-frequency trading.
Greg Valliere, chief strategist at Horizon Investment, said Clinton would seek to preserve Dodd-Frank. "I just don't think she's that comfortable with going back to Glass-Steagall," he said.
Gardner pointed out, in a note, that Clinton's running mate Sen. Tim Kaine, D-Va., recently signed letters to regulators seeking tailored capital and liquidity rules for regional banks and exempting community banks from some consumer protection regulations.
With the polls showing a much closer race, Gardner said it's now more likely that Republicans will retain control of the House of Representatives.
"We're now pretty sure we're going to have a very close presidential election. I think a few weeks ago people thought Clinton would win this easily and Trump could implode and that would take down House Republicans. That now seems a remote possibility. Now the more likely outcome is a close election that could go either way, and that does not signal a shift in the House," said Gardner. "It does not suggest a tidal wave of Democrats in the Senate."
For that reason, whoever is president will have to negotiate with Congress. "We're going to go have a closely divided Congress and we're going to have a president who in order to get anything done is going to have to negotiate … In that kind of environment, people are foolish to dismiss the reintroduction of Glass-Steagall," said Gardner.