I promise not to bore you forever on the subject of limiting bank size, but here’s a suggestion from Willem Buiter that seems to make sense. It’s part of a list of proposed regulatory reforms:
(2d) There has to be international agreement on restricting the size and scope of financial institutions. Aggressive enforcement of anti-monopoly policy and the imposition of capital requirements that are increasing in the size of a bank (for given leverage and risk) would be two obvious tools for achieving this.
This seems both better and more workable than a flat cap on assets. What he’s suggesting is that the bigger a bank gets, the higher its capital ratio should be. This accomplishes two things: (1) it puts natural downward pressure on bank size since higher capital requirements reduce leverage and profitability, and (2) if a bank gets big anyway, the higher capital ratio makes it less likely to fail and cause systemic problems. Sounds reasonable to me.
