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TheStreet Open House

Big Bank Break-Up Is Already Under Way

Stocks in this article: BACCJPMGSMS

Still, while the political rhetoric against big banks is on the rise, regulators might not be in favor of mandating bank break-ups, according to KBW's Gardner.

"Regulators are wary of mandating a break up especially after banks have raised so much capital and the economy is growing modestly," says Gardner. "For all the talk that regulation should be countercyclical, regulators are human and tend to be pro-cyclical. They are going to be wary of direct intervention."

Instead, Gardner expects that regulators will simply make business unprofitable for big banks.


Indeed, in Congressional testimony last year, Bernanke said that post-crisis regulations requiring large banks to hold higher capital and subject them to a greater supervision would "take away the advantage of size."

"Market forces themselves will make it attractive to downsize, rationalize and so on," said Bernanke.

Bank stock performance has improved over the past year on the back of the housing recovery, but big banks are no longer able to deliver the returns on equity they once did.

Regulators have raised capital standards and dictate what they can or cannot do with their capital. Big banks have been effectively banned from considering further acquisitions. They also need the Fed's approval to raise dividends and buy back shares, and the regulator has been tightfisted in handing out approvals for big capital deployment plans.

Late last year, a group of shareholders called for the breakup of Citigroup (C), as its stock constantly traded below book value. The SEC has allowed Citigroup to block the shareholder vote on the potential breakup.

But shareholders' demand for better returns have forced Citigroup to shrink. The bank has in the last few months embarked on a massive restructuring operation to boost returns to shareholders. Citi is in the midst of slashing 11,000 jobs, closing branches and plans to exit several unprofitable markets that fail to deliver on targets..

Other banks are also set to get smaller. Bank of America (BAC) has been selling off non-core assets for the last few years and continues to reduce its balance sheet.

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