One of those is to reduce the size of banks (when I say size, I am including the interconnectedness of banks as part of the definition). When I asked Ben Bernanke why banks had to be too big to fail, I wasn’t convinced by his answer. I’ve yet to hear a convincing argument as to why we can’t break large banks up into smaller pieces. However, while breaking banks up might help, it is unlikely to fully solve the economic problem — the right type of systemic shock could still take down two smaller banks derived from one larger one as easily as the larger bank itself. But it does at least reduce the political power of the large banks, an important consideration, and there are cases where smaller banks would, in fact, be safer.
Update: See also:
TARP oversight report: ‘Implicit guarantee’ of future bailouts hampering reform, The Hill: Unwinding the Treasury Department’s $700-billion rescue program will be difficult, so long as there is an “implicit guarantee” that the federal government will continue to save failing banks, according to a new report.
The 2008 Troubled Asset Relief Program (TARP) has ultimately prompted banks to adjust “to the notion… [they] will be safe, no matter what,” explained Elizabeth Warren, chairwoman of the Congressional Oversight Panel that has been tracking those dollars.
“The whole market has adjusted to the notion that the big banks will be safe no matter what, and they can start planning their business approaches accordingly,” Warren told CNBC on Thursday. “And thats dangerous.” …