Citigroup and J.P. Morgan Chase May Be Too Big To Break Up

This year, at their annual meetings, shareholders of both J.P. Morgan Chase and Citigroup will have the opportunity to vote later this year on whether the banking giants should break up into smaller, more manageable pieces.

Spurred by proposals by Bartlett Naylor, a financial policy advocate at the activist organization Public Citizen and a shareholder in both companies, the votes are not a hard break-up-immediately decision, but rather a referendum on whether to form committees to look into the viability of splitting the companies up.

Naylor worries that the large size of the banks hampers their stock values, and claims that by breaking up, the banks will be protecting investors by compartmentalizing risk.

“Our concern… is that a mega-bank such as Citigroup may not simply be ‘too big to fail,’ but also ‘too big to manage’ effectively so as to contain risks that can spread across Citi’s business segments,” Naylor wrote in his proposal in Citigroup’s proxy statement released Wednesday. “Many smaller banks have proven far better investments. Just as in the 2008 crash, shareholders will suffer in the next crash at Citi.”

The proposals to split the banks up will be addressed in the annual shareholder’s meetings of each bank, with Citi’s meeting scheduled for April 26.

Calls for breaking up the banks have grown louder in recent months, with Bernie Sanders’ presidential campaign bringing more attention to the notion recently. Last month, newly-appointed Federal Reserve Bank of Minneapolis President Neel Kashkari echoed Sanders in saying that more needed to be done to rein in the size of big banks to safeguard the economy from another cataclysmic meltdown.

As it is now, both banks have been voluntarily shrinking over the last several years, shedding lagging holdings. Citigroup (C), which has a market cap of $122 billion, responded in its proxy statement by recommending that shareholders vote against the proposal, noting that it has worked to divest itself of unproductive assets over the last eight years. For instance, Citi Holdings, which held assets worth $619 billion in 2008, now only holds $74 billion in assets as of 2015.

Even if shareholders voted for the breakup—an unlikely scenario, given that last year only 4 percent of Bank of America investors voted to do so after Naylor made a similar proposal—splitting up the banks would prove to be extremely difficult to pull off. The Federal Reserve would have to sign off on any such move, and wouldn’t do so unless each new company is demonstrably profitable.

“The dirty side of it is these large banks are very much economies of scale, with the profitable divisions propping up other, less lucrative divisions,” said Christopher Whalen, senior managing director of financial institutions at Kroll Bond Rating Agency. “You would have to put enough capital and enough assets with [the lesser departments] to make sure they’re profitable, which would be very complicated.”

Still, if a workable solution could be found, shareholders could see significant benefits. According to a 2015 Goldman Sachs report, J.P. Morgan (JPM) would be worth as much as $70 a share if it were broken up into four parts, or roughly 20% higher than where they are trading now.

But even if J.P. Morgan were to be split up into four pieces, they would still rank among the largest banking entities in the nation, which wouldn’t do much to reduce the systemic risk, according to a 2015 report by Guggenheim Securities. In order to reduce the risk in a truly meaningful way, J.P. Morgan would have to be split up into several more pieces. Fracturing the company that much is likely “not a technologically, managerially, or operationally feasible outcome,” according to the Guggenheim Securities report. So splitting the banks up, at least in J.P. Morgan’s case, could be more for political show and an economic cash-grab than for protecting the economy.

So while the big banks may be too big to fail, at least for now they appear too big to break up as well.