The Case for Keeping Banks from Growing

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Over the past fifteen years or so, the nation's five largest banks have grown to a point where they now hold nearly 40 percent of the country's deposits. And in the middle of the financial crisis, banks were able to skirt a law that kept any individual institution from holding more than 10 percent of deposits. Now Bank of America alone holds 12 percent.This is bad for you because big banks charge higher fees and compensate for their bad terms with ubiquitous ATMs and advertising.Big banks are also just less efficient, though. In banking, bureaucratic friction means that economies of scale actually favor smaller institutions.The New Rules Project argues that we need to reestablish a strong cap on bank size, and recommends people support Sherrod Brown's idea.

Brown's amendment would prohibit banks from growing - either on their own or through acquisitions - to the point where their non-deposit liabilities (including off-balance sheet liabilities) amount to more than 3 percent of the country's gross domestic product.Brown's cap does not allow any exceptions. It mandates that banks that are over the limit divest some of their assets or otherwise shrink. Its passage would entail downsizing at least five of the country's largest banks. Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase and Morgan Stanley, all of which now have non-deposit liabilities in the neighborhood of 5-8 percent of GDP, would each need to be split into two or three separate entities.

It does seem a little crazy that we came out of the financial crisis with bigger banks-and fewer points of failure-than we had when it started.