(1) Ratchet up capital requirements as banks pass certain asset-size thresholds. Citigroup, for example, should carry at least TWICE as much capital (on a percentage basis) as a plain vanilla community bank. Currently all the banks are treated equally from a capital standpoint.
I don’t agree with this one. The small banks pose a risk if there are regional and systemic problems in the system. The large banks only pose a risk when the problem is systemic. Many of the large banks who got TARP funds are starting to recover, but several of the small banks who got TARP funds are looking like they may never recover. Larger capital requirements would also place them at a disadvantage.. and you might start seeing the gaming of this by having bank holding companies… which hold ownership in smaller banks (sized just under the threshold)[/quote]
Yes, but the dollar amount involved with any single Big Bank dwarfs the cumulative dollar amount involved with even a large collection of community banks. For example, the dollar amount of failures in any one region will be a fraction of the dollar amount involved in the WAMU failure. So, yes, a lot of small banks will fail – probably 500 or thereabouts – but the damage to the FDIC Insurance Fund will be small relative to a single Big Bank failure. And if larger capital requirements place the Big Banks at a disadvantage, then so be it – that’s part of the price they should pay for being “too big to fail.”
