Perusing yesterday I found this article about a plan coming out of the Dallas Fed that would use authority provided by Dodd-Frank to put a limit on the size of financial institutions by assets. According to the article, the bar would be set much lower than the current size of the largest banks in order to allow the FDIC to shut them down without needing to access taxpayer funds. Additionally, the plan would reinstitute the wall between investment and consumer banking.

Of course, the bankers don’t like the idea. They believe we need very large banks to have the ability to create the largest individual pools of capital on the planet. I’ve talked about this before; money = power. Big banks might represent one-stop-shopping for the big boys, but it also has a side to it that none of the bankers really want to discuss. What happens when the power that comes with huge pools of other-people’s-money is abused? Is that a good way to efficiently allocate capital? I think not.

The philosophical part of me is having a hard time with this proposal. I don’t believe government has much of a place in regulating banking and financial institutions to the extent it has been over the last 80 or so years.  I find nearly everything about the current state of banking rather revolting, however, given that legislated lack of competition in investment services, much of it from Sarbanes-Oxley, created this nightmare of the majority of the investment channels in the hands of just a few very large firms. That was the intent. They got it, abused it, and taxpayers got to be lender of last resort. It’s a very ugly state of affairs.

It would be nice if we could just cut them all lose and tell them to sink or swim – let the markets deal with them. But I am very aware that’s not the world we live in. So I think that if we’re not going to get at least a repeal of Sarbanes-Oxley, the plan to break up the behemoth financial firms that were fostered by government in the first place might be worth supporting. I would not support the partition between consumer and investment banking, however. I believe that having these services commingled is better for average Joe consumers, as long as they are informed about any risk involved with their account balances. Consumers should be able to have a choice about which accounts they want to hold; and they should be able to do it at the same financial institution.

[Update 3/15]

I found another article about new rules for the big banks here on If you follow that link, there are several more links to stories about the same topic. They are all interesting. This particular one quotes Alan Greenspan as saying that the problem of TBTF has only gotten worse since the financial crisis, and that “push came to shove” he would support a break up of the big banks.