I just wrote a piece for The Weekly Standard—on newsstands now!—on breaking up America’s very biggest banks. But there are certainly other ideas for how to deal with the Too Big (and Interconnected) to Fail issue. Here are a few of them and why they are problematic:
1. Cap bank size. It’s not clear what exactly that size limit should be or how it should adjust over time. And while we could forbid mergers, banks could still get bigger via organic growth.
2. Let Dodd-Frank works its magic. First of all, the recent problems at JPMorgan make me doubt the efficacy of bank living wills. Second, if you look at past financial history, it seems doubtful that some future Treasury Secretary will make the hard call and choose liquidation over a bailout. As Thomas Hoenig explained back in 2001 when he was at the KC Fed: “Given the tradeoff between costs and economic disruption that are large, highly visible, and immediate versus benefits that may take years to be recognized, the more likely scenario is that regulators will choose to bail out the company. This decision is even more skewed to avoiding the short-run costs because of pressures on regulators from politicians and the big banks.” And, again, if Jamie Dimon doesn’t understand the risks his bank is taking, will government bureaucrats?
3. Improve capital regulation. To set risk-based capital rules, you need to understand the risks, yes?
4. Systemic risk fee. See previous answer.
I would also highly recommend this piece by Luigi Zingales on the subject.